Business Model Thinking

A Company Is Only As Good As Its Business Models

A business model describes the core logic of how an organization creates a value proposition, how the value proposition is fulfilled to customers, and how the organization generates revenue from fulfilling the value proposition. A common misconception is that an organization itself has a business model. However, it is an organization’s offerings that each has a discrete business model, not the company as an entity.

There is also confusion regarding the distinction between a value proposition and an offering. An offering is a product or a service or a combination of products and services (usually the case). Every offering is premised on a value proposition — claims made regarding how an offering will enable customers to achieve their prioritized desired outcomes with respect to an important job they want to get done. Thus, an offering is the means by which a value proposition is fulfilled. A single offering can fulfill multiple value propositions.

The focus of a business model is on a value proposition(s), not the specific attributes of an offering. Offering attributes are important to be sure, but this is the domain of offering design, not the business model. Although the business model and offering design are different considerations, they are highly interdependent. A poor offering design inhibits a business model from effectively fulfilling a value proposition, no matter how good the business model may be.

Many elegant business models fail due to a poor “fit” between an offering design and the prioritized desired outcomes of target customer segments. Conversely, a weak business model will constrain demand for a well-designed offering, perhaps even causing it to fail in the market. We see this all the time.

It should be noted that a business model is not the same thing as a strategy.

A [competitive] strategy is a set of decisions about how an organization will leverage its resources, capabilities, and market positioning to generate profitable revenue over time from its offerings in a competitive market(s). Conventionally, the unit of analysis for formulating a competitive strategy is the organization itself.

Here the focus is on leveraging an organization’s industry position, competences, inimitable resources and capabilities (among other things) to attain the Holy Grail — sustainable competitive advantage. With such an advantage, industry competitors are unable to produce substitute offerings that can effectively compete with the organization’s offerings.

Competitive strategy as applied to the business model is different. The objective of business model design is the profitable creation and fulfillment of a value proposition. The problem is that “fast follower” competitors can quickly imitate a good business model if there are no formidable challenges that impede them from doing so. For an offering to generate a desired amount of profitable revenue over time, an effective competitive strategy is required for the business model itself — a micro strategy. In this case, a micro strategy is “baked” directly into the business model design rather than something to be considered after the fact.

The objective of a micro strategy is not to achieve sustainable competitive advantage for the organization in the conventional sense. Rather, the objective is to forestall competitive imitation of a business model for as long as possible to maximize the profitability window. It is assumed that competitors will eventually imitate the business model or introduce an alternative business model (a workaround).

Thus, in the world of business models, there really isn’t a sustainable competitive advantage, only temporary competitive advantage stemming from good business model design. For this reason, strategy considerations do not come after the business model design process. Strategy drives the design process from the beginning.Even though a micro strategy is expressed via the business model design, it is a separate consideration from the business model.

No matter what the value proposition or the type of organization that offers it, all business models involve a common set of factors that work together as a system enabling value proposition fulfillment.

More specifically, the business model is a systems view of these factors from three different perspectives — value proposition creation, value proposition fulfillment, and revenue capture. A business model enables an organization to see the whole picture from 100 thousand feet up, not fragmented pieces that often pass as a business model.

A good metaphor for a business model is an automobile engine. All the various parts of an engine have a critical role to play if the engine is going to work at all. If any one of these parts does not work, then the engine as a whole will not work. If any one of these parts work poorly, then the performance of the entire engine is constrained by this part. A business model works on the same principle, which is why a profitable offering is sometimes referred to as a “growth engine”.

Customers care about offerings, not business models. That is, customers are focused on the important jobs they want to get done and how offerings can help them get these job done as effectively, conveniently, and as inexpensively as possible. Customers evaluate a specific offering based on how well it can help them achieve their prioritized desired outcomes relative to a job to be done. So from the customer’s perspective, an offering is a potential solution. Customers compare an organizations’s offering with other market solutions and select the one that is the best overall value for them. The business model plays a significant role in how customers perceive the overall value of an offering.

While customers are concerned with offerings, organizations need to have an adept understanding of the business models underlying their offerings and how continually changing business realities can affect them.

Ultimately, it is customer demand that drives revenue. Sustainable growth is the generation of profitable revenue over time. Therefore, a key driver of performance for any business organization is the magnitude of customer demand that its business models can attract and retain in a competitive marketplace. Stated another way, an organization prospers or languishes based on how well the organization can create customer demand. For this reason organizations must have a keen understanding of their business models and the factors in the business environment that can potentially increase or decrease the efficacy of their business models. This is the essence of business model thinking.

Customer demand can change suddenly due to unforeseen circumstances. Maybe a known competitor innovates a new business model that significantly increases demand for its offering, effectively decreasing demand for your offering. Perhaps a company that you never considered a competitor introduces a disruptive business model that pulls an entire customer segment away from your offering. Circumstances can change your customers’ priorities causing them to devalue your offering. A new technology comes along enabling your customers to satisfy their needs in a different way not previously available to them, effectively reducing demand for your offering.

Today’s complex and fast-moving environment necessitates a granular focus on individual business models, their micro strategies, and the continually changing business realities that can affect these business models for the better or for the worse.

The Business Model Canvas (BMC) is a popular business model tool. The BMC consists of nine interrelated components or building blocks. Each of the nine building blocks is a piece of the overall logic that determines how well a business model is able to work. Each of these building blocks involves hypotheses or assumptions. While assumptions can be valid today, changing business realities can quickly invalidate them. Because the business model works as a system, a flawed assumption associated with one or more building blocks weakens the whole business model.

We developed an additional business model tool called the Value Exchange Map (VEM). A VEM captures the value exchanges among the players in a value network providing a different vantage point from which to view the business model. When used adjunct to the Business Model Canvas, a VEM provides a kind of stereo vision that renders both a company-centric perspective and a value network perspective of how an organization generates revenue by fulfilling a value proposition. With this stereoscopic view, micro strategy can be better explicated and developed for a business model ensuring the profitable fulfillment of a value proposition over time (see VEM post).