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What Is a Business Model – And What Is Yours?

#03 Innovation Newsletter

Innovation Newsletters

“Business model” is a term that comes up frequently in the context of innovation. You hear about emerging, disruptive, and open business models, business model analysis, and business model innovation.

But do you know what the term means exactly? There’s an array of definitions out there, but we find it most useful to view the essence of a business model as follows; it should…

  • Concisely describe the value proposition an organization provides to its customers;
  • Capture the infrastructure – the high-level structures, capabilities, and processes – used to create and deliver that value; and
  • Outline the key financial parameters of the business.¹

Is there consensus in your organization about what your business model actually encompasses? When it comes down to articulating it clearly and comprehensively, managers in most companies find that they have different conceptions of what the term means, and what their organization’s model is, precisely. Moreover, they’ve probably not been aware of the gap in understanding.

As one Innovation Survey respondent from a major global manufacturer that’s been working to articulate their own business model put it, “The president understood that this [process] was necessary, but most others thought it was a waste of money, that they already know their business model. That’s why the term ‘articulate’ was used, rather than ‘define’ or ‘develop’.”

Why should you care?

One reason to probe your current understanding is that arriving at a clear conception of your present business model-and one that’s shared by top-level executives and managers-is an important step in identifying opportunities for innovation.

Simply bringing the model to light can spur ideas about new ways of going about your business that get beyond the territory of traditional R&D and product development. It can help you see opportunities for disruption that you (or your competitors) can leverage. And it provides a useful context for understanding whether ideas and concepts for new offerings under evaluation can be launched within the constructs of your current model, or whether a new one needs to be devised to support successful commercialization.

When mapped, a typical business model framework covers the following nine elements:

  1. Value proposition (the mix of goods and services for which customers are willing to reward you)
  2. Customer segments
  3. Customer relationships
  4. Distribution channels
  5. Core capabilities
  6. Key partners
  7. Key activities
  8. Cost structure
  9. Revenue streams

Working together as an executive team to map out these key structures at the corporate or business-unit level can help you accomplish a number of strategic objectives, including.

  • Clarifying a common understanding among the management group;
  • Assessing your model against competitors’ approaches and identifying strengths, weaknesses, and opportunities for disruption;
  • Setting the context for creating new offerings and potential future-state business models;
  • Deciding whether innovation at this level is worth pursuing in your organization.

All business models and each of their elements (including value propositions) have a limited lifespan and will become obsolete. How risk-prone is yours? Viewing it with a skeptical eye on a regular basis should be a mandatory exercise.

  1. Osterwalder (2004). The Business Model Ontology. As Osterwalder defined it, a business model describes the value an organization offers to various customers and portrays the capabilities and partners required for creating, marketing, and delivering this value and relationship capital with the goal of generating profitable and sustainable revenue streams.