It was Schumpeter whose acute insights about disruptive innovation and entrepreneurship are still present with us in works of Christensen, Drucker, …
What is business model?
Many people assume that as long as they have a great product or amazing service, success is a guarantee. This is an illusion, especially in the rat-race of the 21st century. Without a solid and well-thought business model, organizations/firms struggle to grow or even to survive.
Let’s define few terms, before continuing. Traditional business model has six components: value proposition, market segment, value chain structure, revenue generation/margins, position in value network and competitive strategy. The successful ones, however, tend to have the following three common features: offer a unique value, are difficult to imitate, and meet/create an (untapped) market demand. For the Internet, online business models became essential for online companies and traditional ones expanding their reach into the online. Online business models form an ecosystem comprising of four parts: company, customer, product and experience.
Some, Dot-com bust exposed an armada of good “look-and-feel” online companies, which had no working/sustainable business model and were a mere fluff in the market. But it is not only dot-coms that fail to conceive a deeper value in their offer. Some traditional businesses (such as newspapers), which branch out into online, blur their existing business models (by charging for access to obituaries while charging fee from those who choose to put them in the paper).
Is there a “right” business model for a company?
Some companies, both purely online or traditional, finding a business model that works, try to protect it as as Netflix did when it filed and was granted a patent for its business models (subsequently suing Blockbuster for patent infringement). An example of a very successful business model was at Xerox. It created the world’s first automatic paper copier. Xerox saw that with the high expense for each machine, there was no room for a substantial profit by simply selling machines. Their initial business model was based on the idea of leasing the machines and charging a fee per copy made. Because of its innovative and strong marketing activities, Xerox brand-name gradually became a verb “Xerox” which stands for copying paper (like Google stands for search). Recently, by incorporating environment-friendly concepts into their business model, Xerox started producing earth friendly designs that helped it save USD 2 billions in last 2 years.
On the Internet, where some social networks take a gigantic chunk of users’ online “time” are not, generally speaking, a commercial success and the investors are generally apprehensive about the business model they pursue – Facebook (which makes money from brand ads, partnerships, paid applications like virtual goods and performance ads) and Twitter that are still with us contrary to countless others that did not survive. Some suggested Twitter – it recently debuted its promoted tweets – to build business models around data mining and performing trend analysis, feed advertising, SMS ads, and subscriptions, integrating contextual ads, apps, and pages or even selling/suggesting friends. Lastly, few envision a tiered/freemium model whereby “basic” Twitter remains free but a premium service (a version of promoted tweets with more flexibility, options and cost structures) is offered for online brand builders and commercial businesses. Indeed, the whole business model/monetization topic for Twitter (and for Facebook) are so hot a topic that there are few dedicated topical channels as this one on Business Exchange.
Society + business = ?
Few days ago, the US state of Maryland has become the first state in America to recognize a new type of socially responsible corporation that can consider the public good in addition to shareholder obligations in business decisions. Until now the term “corporate social responsibility” was a badge for innovative, brave and socially conscious businesses such as Ben & Jerry’s whose social activism is well-known. There was no law supporting what they did. From now on, businesses that become (by amending their charters) “benefit corporations” may consider factors like employee interests, the environment and promoting arts and sciences, as well as shareholder interest.
And last but not least, what have you heard of a company called TOMS? Even if you have not, you will, very soon because they just completed giving away a million shoes. Their business model is simple: for every pair of shoes bought, they give one pair away. TOMS calls their model – unsurprisingly – One for One. Their name, TOMS, is taken from the word “tomorrow,” being part of the idea that if you buy a pair of TOMS shoes today, a pair is given away tomorrow.
What is the business model you currently operate in? Is your business model in-line with trends and values of your society, your target market and in the 21st century?
Many entrepreneurs and businessmen, especially those tech-savvy (co-) founders whose rise is almost as accidental as that of Facebook, do not know or give enough consideration to business model of their businesses. Small businesses and startups are especially prone to this problem, as they focus on (new) product releases and never pause to assess and review their businesses or just vow for a “marketplace” business model. The results? Many startups created but most of them fail without achieving any traction nor causing any significant impact.
What is needed is a paradigm shift. Every business venture/initiative needs to have a business model in a short- or long-term. The model expands on how the parts of the business work together to create profit and (eventually/ideally) growth. While the proven razor-and-blades model has been working and stil lworks for many a business, many startups and small businesses grow exponentially by embracing innovative business models for such wide and overcrowded markets as online gaming or discount markets.
What is needed is creation of a business model around a thick value. A flawed/misconceived business model might have a number of shortcomings, including:
- un-Sustainable – if the business is built on momentary or not well-thought-out concept/trend, it cannot be sustained for long, only working (and perhaps providing profits in a short time span).
- un-Scalable – This is usually the result of business short-sight when first launching the business. User-base, marketing or demand growth can all lead to decreasing efficiencies/quality of the product. ‘How long could my business continue to operate successfully without me?’ If the answer is not long then it is to dependent on you. The result is your business can not be scaled up beyond your own personal efforts.
- un-Profitable – Companies might grow but not become profitable, the eventual side-effect of any sustainable and successful business. There is a deep need of understand the concept of a profit model.
- un-Valuable – Is the business creating a real, thick value? Is it addressing an (un-addressed) need in a market? Is it addressing an (addressed) need in a more innovative, cheaper and sustainable manner? If NO for any of the two, than perhaps it is time to re-invent your business.