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What is Business Model ?
There are number of people who frequently use the terms 'business model' and 'strategy'. But still the meaning of these terms is ambiguous. In simple terms, strategy is a plan which determines company's proposed future goals. While, business model is an intellectual depiction of a strategic plan applied by a company to generate revenue and earn profits. Thus, a business model can be applicable to more than one organization and several business models can constitute to a firm's strategy.
Magretta proposed the definition of business model a business model is a notional or symbolic representation of a characteristic of a firm's strategy. It summarizes the necessary specifications required by a firm to successfully furnish value to the customers.
A business model is the core narration as to how and why the organization's product line and competitive viewpoint will generate revenue. It also specifies the relation with the cost structure of the company that yields lucrative earning opportunities and return on investment. A suitable business model is required for a new and existing venture to obtain value from an innovative. These models transform new technologies into cost-effective means.
Sometimes, a well-known business models cannot be applied to new ventures: hence a new model is necessary for start-ups. It is not just the model which is solely significant at times. The importance lies int the innovative business model and not in the innovative products or services offered by the organization.
The various complications related to the firm's products, markets and external environment is understood by few or no individuals. Technical specialists understand their field of activity and the business experts understand their work. A business model help to associate these two fields as show in figure :
Components of the Business Model
A business model is used as a resource for several business subjects like marketing, finance, economics. strategy, entrepreneurship and operations. A business model helps to predict the profits to be earned with the help of innovation. The 6 important components of a business model are as follows :
1) Value proposition :
It is an explanation of a customer's problem, the product which solves the problem and the customers' viewpoint towards that product value.
2) Market segment :
It consists of specific set of people to be targeted and identifying different market segments having different needs and demands. At times, the potential of an innovation is revealed by considering a different market segment.
3) Value chain structure :
It implies the place a firm and its activities hold in a value chain and manner in which the firm apprehends the part of value created by it.
4) Revenue generation and margins :
It explains the process of revenue generation (including sales, support, subscription, leasing, etc.) the cost structure and the targeted profit margins.
5) Position in value network :
It recognizes the competitors, complementary and network effects which can be used to provide added value to the customers.
6) Competitive strategy :
It specifies the strategy adopted by a company to create a sustainable competitive advantage. For example, the company can attempt to design a strategy by means of cost, differentiation or a niche strategy.
Business Model and Strategy
Every company's business model has a common issue which is related to the selection of a strategy whether the strategy is sound enough or not from profit-making perspective. The idea of company's business model is restrictively concentrated in comparison to the company's business strategy. A business strategy of a company is majorly concerned with its business approach and competitive capabilities. Whereas, the business model is all about revenue and cost generation from the business strategy which indicates business sustainability. The leading players in the industry have business models i.e. both proven 1.e. both in terms of feasibility and profitability. These proven business models have distinct strategies to earn profits and also have a realistic approach towards business. Organizations which are in the initial stages of business or which are incurring losses have a debatable business model their strategies still seek to generate high outputs which portray their ultimate intentions and this act ruptures the viability of the business enterprise.
Business model concepts are diverse from the business strategies of an enterprise. Some of these distinguishing factors are as follows :
- A business model begins the process by identifying and developing value for consumers and establishes the model in a way which delivers value on a Business regular and reliable basis. strategy majorly concentrates on handling the competition faced in the industry.
- A business model defines the fundamental reason of an enterprise i.e., the value that the entity offers to to its customers, whereas a strategy defines the plan of action.
- There is a difference between creating a value base for the company and creating value for its shareholders. Many times, the financial aspects of a business are excluded from the business model. Internal corporate resources are supposed to be financed out of the business model so that they do not feature eminently in the model. Similarly, the business model of a new requires venture capital financing from the initial new entity stage of the business cycle. While, designing a business model, integration of financial domain is necessary to convert value in the business into value for the shareholder.
- The intention behind the formation of a business model is based on the facts that the understanding of the consumers and other client parties, is restricted and is prejudiced by the previous accomplishments of the firm. Usually, a strategy demands cautious, analytical computation and choice which is based on the presumption that a large amount of definitive data is available. It also concludes that any cognitive constraints by the firm have a restrictive significance. Thus, in the creation of a business model, it is significant to interact, share and frame new innovations with the help of external stakeholders whereas during strategy formulation these activities are primarily undertaken internally.
Both the concepts of business model and business strategy are not similar but are supportive in nature. At the same time, while designing a business model an individual has to design a strategy which is matching with the business model created. Similarly, a business model design can be affected by the strategic reasoning, enabling the model itself to be a prime distinguishing factor. However the design of a business model has important indications for value representation. It states how value is generated with the help of suppliers, partners and customers.
The following important relationships between a business model and business strategy should be considered for business organizations :
- A business corporation has a varied number of business units or business divisions. Generally, all these units or businesses compete in different industry other than the parent industry.
- Competing industries should always have different business model for each type of business so as to provide sustaining and unprecedented value innovations. A corporation should have a composed strategy which includes several business models for all the industries where the corporation is present (along with few new business models guiding into new industries or inducing creation of new industries in the near future).
- Every business model whether new or existing should have a strategy which forces the business model towards proper implementation that gives the model a distinguishing character from present or prospective competitors.
Relationship Between Business Strategy and Business Model
The methods or techniques used by a business to attain its organizational mission and objectives are called the "business strategy". A mission defines the fundamental value system, long-term goals and the overall purpose of the business. For example, a grocery shop may have the goal of profit-making by offering good quality food items to customers, maintaining its environmental impact to the minimum possible level and strengthening its position in the local market. A company's strategy involves procuring of goods from the local food producers, motivating customers to carry their own grocery bags, giving advertisements in local newspapers and procuring recycled product packaging materials. A business strategy involves the method to deal with opportunities and threats it confronts.
A company's business model concept works closely in connection with the concept of business strategy. The business model outlines the basis which creates the value; provide the value to its customers and in return collects earnings from them. Considerable variation is observed between business models from one company to another. For example, a business model of a grocery, shop may include purchasing food items at wholesale prices and selling it to customers at a higher price to earn profit. On the other hand, a website might include a business model which provides video content to end users and earning income by showing advertisements on the website.
A business model of a company functions as a part of the overall strategy of the business. It provides the fundamentals of how a company earns profits to accomplish its organizational objectives. For instance, if a website is not earning sufficient profits by advertisements then the management may change the model by selling other goods via online store to improve the profitability level.
Differentiate Between Business Model and Strategy
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