‘When I think about business models, I’m reminded of US Supreme Court Justice Potter Stewart addressing the question of pornography: “I shall not today attempt further to define [pornography] . . . and perhaps I could never succeed in intelligibly doing so. But I know it when I see it.” As for me, I’m not sure I could define a business model, but I know a business model when I see one’. John Biondi, serial entrepreneur and director of the ‘Discovery to Product’ Programme at The University of Wisconsin-Madison (personal interview)

Business models have been mistaken for many other business concepts. Before we consider what really is known about business models, and before we dive into building business models, we should be clear about what business models are not.

 

A business model is not a picture

The tools for evaluating business models are effective and efficient guides for capturing, evaluating, designing and/or changing a firm’s business model.

Generating a business model map or canvas provides a valuable representation of organisational elements and, hopefully, how those elements interact to generate value.

The map can be an extremely effective communication tool, allowing managers to convey complex ideas and structures quickly and simply. As noted, however, this simplification often relies on analogies, which may be misleading.

The ‘real’ business model of an organisation is, ultimately, realised only in the operational combination of resources and activities (transactions) as the firm functions. Generating a business model picture, map or canvas guarantees nothing about how, if or when the business model actually happens. Ultimately, the business model map, picture or canvas is only as useful as its implementation at the organisation.

 

A business model is not a marketing strategy

‘Free-to-play isn’t a business model. Free-to-play is a marketing strategy. It’s a way to get people over the hump of trying out your game. It gets rid of the friction that happens when you charge an upfront fee.’ Mitch Lasky, Benchmark Capital, Disney, Activision, EA

A common practical misuse of business model analysis is to better explain its value proposition to potential customers. Whilst this is, potentially, an admirable and valuable activity, it is not really business model analysis at all.

Some entrepreneurs, managers and organisations approach business model change or innovation as a potential cure for a perceived mismatch between current organisational capabilities and the needs of the market segment. In theory, business model analysis and (re)design could, in fact, help determine how the firm’s products and services could be better marketed. Business model analysis, however, is not primarily intended to resolve marketing issues. In fact, when business model thinking is shrewdly applied to marketing problems, it often generates unexpected or even unwanted results. Managers looking for a quick fix for a perceived weakness in marketing are sometimes presented with a radical process redesign of customer relationship management, or an entirely new value creation process to address unmet customer needs. These could well be useful or necessary, but they could also simply mask poor marketing implementation.

 

A business model is not an investor pitch

Venture capitalists and other private investors were some of the first to appreciate the power of business model analysis. Unlike a business plan, which describes a commercialisation strategy, a business model maps the unique elements of value creation. That can be quite compelling for an investor trying to assess whether or not a new venture has real long-term potential.

But investors need to see a lot more than just a business model canvas. In fact, it is highly uncommon to see a business model canvas included in an investor pitch. Business model canvases tend to be:

  • information-dense and difficult to display in an actual presentation or written report;
  • filled with shorthand, company-specific jargon or acronyms that are not obvious to an outside observer; and
  • unlikely to convey the most critical success factors or unique innovations because everything in the canvas appears to be of the same level of importance.

 

A business model is not a demonstration or test of profitability

A business model analysis can clarify whether the pieces of an organisation can be combined and coordinated to create value. In theory, good business model analysis helps identify whether or not an organisation, such as a for-profit business, is viable or not.

A business model does not directly demonstrate or test whether or not a business will be profitable. Business model analysis can help point the way towards organisational components and structures aligned with corporate strategy. Profitability results primarily from strategic implementation in a competitive context. A business model can be a powerful input to your overall strategic plan, but it will not replace your strategic plan or deployment.

 

A business model is not an opportunity evaluation

A business model can explain how an organisation could exploit an opportunity. But the business model does not address whether the underlying opportunity is inherently attractive or not. One of the hard lessons of entrepreneurship is that not all opportunities are created equal. Some opportunities are bigger, some are easier to access and some have more long-term potential.

Assessing opportunity attractiveness requires thinking carefully about the target market and the industry context in which the organisation will compete. A thoughtful approach to business model analysis can help explore this. But the business model framework provides no specific evaluation of how attractive an opportunity is.

 

A business model is not a corporate strategy

Managers and scholars have struggled to clarify the relationship between business models and corporate strategy. Some scholarly publications that would otherwise appear to address ‘strategic’ issues claim to study business models. For example, airlines such as Southwest and Ryanair have long been identified as a clear case of implementing a lowcost strategy. In recent years, however, business researchers have begun referring to these as examples of ‘low-cost carrier business models’.

Corporate strategy (or competitive strategy) is one of the oldest, most important and well-developed of all management topics in research and practice. Does a business model subsume corporate strategy? Or perhaps a business model is just a component of a firm’s competitive strategy? After all, corporate strategy deals with resources, transactions and competitive advantage and value creation. Are business models and strategy just the same, in the end?

They are not the same. Strategy addresses positioning against competitors whilst business models are for exploiting new opportunities. But it is easy to confuse them.

 

Adam J. Bock and   Gerard George  are co-authors of The Business Model Book: Design, build and adapt business ideas that drive business growth (Pearson). It is out now on, priced £10.78


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