Thursday, September 28, 2006

What is the business model?

Academics are beginning to delve deeper into the issue of business models since the first major breakthroughs were made in the late 1990s. Timmer is commonly attributed with bringing the term to light in 1998 with his article, Business Models for Electronic Markets. More recent additions include Afuah's 2004 book, Business Models: A Strategic Management Approach, as well as, a wealth of articles, such as Hedman & Kalling, The Business Model Concept, or Magretta's seminal Why Business Models Matter.

Its importance is widely accepted, even if its definition and understanding are not. The main components of the model include:
1. Value proposition: What is it that a company brings to the market, and what benefits do customers gain from utilizing a company's product and/or service.
2. Target segment: Which customers are the primary users. The value proposition and the target segment must coincide, in other words, your target market should value your offering.
3. Activities: This aspect of the model is what the majority of people describe as a business model; it is usually the most visible and the part of the model that can be relatively easily adjusted.
4. Network: The network describes how a company's partners, suppliers, customers and others all interact with the business model.
5. Competitive strategy: How does the chosen model compare to others in the industry? What advantages and disadvantages does it provide over competitors, and how easily are these eroded?
6. Finances: At the end of the day it is always necessary to do a financial analysis to test the financial sustainable of the business model. This aspect reviews revenue streams and associated costs, and hopefully results in positive figures.

It is imperative that companies realize that business model elements coexist in balance with each other in successful companies. If business model innovation only focuses on one element the balance may be upset, and the remainder of the model may require adjustment to ensure long-term sustainability.

A recent survey by IBM pinpointed that CEOs are paying more attention to business models than in the past. They indicated that business model innovation is a core element of long-term success. Business model innovation refers to a company's dynamics when it comes to adjusting, or changing, their business model to better suit their current market or enter entirely new markets. Examples of business model innovation includes the transition of IBM from an OEM manufacturer to a consulting firm or Apple's transformation from computers to business and consumer electronics.

Business model innovation is beginning to appear more and more in the airline industry. Aer Lingus' transition from a national, full-service network carrier to a low-cost carrier. Aer Lingus was struggling with Europe's largest low-cost carrier, Ryanair, right at its door step and needed to take drastic steps to avoid permanent damage. Today, the carrier is achieving positive financial results and preparing for an IPO. JetBlue has gone against the traditional low-cost carrier grain and aggressively targeted business travelers. The business model that is necessary to target that market segment is different from targeting leisure travelers. Business model innovation is imperative in today's fast-paced business world, and we will be seeing many more innovations within the airline industry in the coming years.

1 comment:

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