Fundamental Facts about Business Models

I am sure you’ve heard the term business model before. But can you honestly say you know what exactly it is about? In short: a business model is a sustainable way of doing business. Here sustainability stresses the ambition to survive over time and create a successful, perhaps even profitable, entity in the long run.

The field of business models is gaining more and more importance. It is, for example, becoming a core management discipline alongside accounting, finance, organization etc. and we soon expect to see teaching modules on business models entering leading Masters and MBA programmes. This is just one of the reasons why we’ll take a closer look at what a business model is all about.

(One possible) verbal definition of a business model

A business model describes the coherence in the strategic choices which facilitates the handling of the processes and relations which create value on both the operational, tactical and strategic levels in the organization. The business model is therefore the platform which connects resources, processes and the supply of a service which results in the fact that the company is profitable in the long term.

Ryanair as an example of a business model

One of the best examples of a business model that has changed an existing industry is Ryanair, which has essentially restructured the business model of the airline industry. As the air transport markets have matured, incumbent companies that have developed sophisticated and complex business models now face tremendous pressure to find less costly approaches that meet broad customer needs with minimal complexity in products and processes. While the generic strategy of Ryanair can be denoted as a low-price strategy, this does not render much insight into the business model of the company.

The low-cost option is per se open to all existing airlines, and many already compete alongside Ryanair on price. However, Ryanair was among the first airline companies to mold its business platform to create a sustainable low-price business. It is the “no-service business model”. In fact, the business model is so well thought through that even the arrogance and attitude of the top management matches the rest of the business. But they can make money in an industry that has been under pressure for almost a decade, and for this they deserve recognition. Ryanair’s business model narrative is the story of a novel flying experience – irrespective of the attitude of the customer after the ordeal.

The 6 parameters that make up a business model

In 2002 Chesbrough & Rosenbloom tried to corner the important aspects to be considered in order to comprehensively describe the business model of a company.

They define six elements which make up the business model:

1. Articulate the value proposition, that is, the value created for users by the offering based on the technology

2. Identify a market segment, that is, the users to whom the technology is useful and for what purpose

3. Define the structure of the value chain within the firm required to create and distribute the offering

4. Estimate the cost structure and profit potential of producing the offering, given the value proposition and value chain structure chosen

5. Describe the position of the firm within the value network linking suppliers and customers, including identification of potential complementors and competitors

6. Formulate the competitive strategy by which the innovating firm will gain and hold advantage over rivals

Great business models start with the right questions

In order to start working with clarifying the business model of a company or an organization, one can start off by asking questions such as:

• Which value creation proposition are we trying to sell to our customers and the users of our products?

• Which connections are we trying to optimize through the value creation of the company?

• In which way is the product/service of the company unique in comparison to those of major competitors?

• Are there any critical connections between the different phases of value creation undertaken?

• Can we describe the activities that we set in motion in order to become better at what we do?

• Which resources, systems and competences must we attain in order to be able to mobilize our strategy?

• What do we do in relation to ensuring access to and developing the necessary competences?

• Which risks can undermine the success of the chosen Business Model?

• What can we do to control and minimize these?