“But what exactly is a ‘business model’, anyway? No one ever defined the term precisely – it seemed to mean either ‘what we do’ or ‘how we hope to make money someday.’”
– Harvard Business Review 2001
Ask any executive or nonprofit leader what a business model is, and you will get a variety of answers. No matter what your industry is—healthcare, education, banking or telecommunications, for example—understanding and being able to articulate your business model is important to an entrepreneur’s success. According to Osterwalder, Pigneur and Smith, the business model “describes the rationale of how an organization creates, delivers and captures value.” The focus of the business model is on the big picture—the distinctive, sustainable, implementable strategy—or the internal workings and value constellation within the firm.
Keep in mind the business model is not a business strategy; it is higher-level thinking, the complex picture that can implement the business strategy.
There are three ways to approach the business model process: by recreating an existing business model (Bright Automotive), reinventing an existing business model (Amazon) or revolutionizing a business model (Cirque du Soleil, which revolutionized the 21st Century circus). Headquartered right here in Anderson, Bright Automotive strives to recreate the business model by decreasing the nation’s dependence on energy by providing hybrid-electric vehicles. A well-known example of reinventing the traditional bookstore is Amazon, which took out the bricks (retail stores) and inserted the clicks (online shopping).
The Business Model Generation by Osterwalder, Pigneur, and Smith, which is a unique business model itself, was collaboration between 450 people from 45 countries who created an informative, design-friendly and structured book that walks the readers through the business model building blocks.
The business model canvas proposed by Osterwalder, Pigneur, and Smith includes nine building blocks. It starts with the organization’s infrastructure, which includes:
- Key activities, which are necessary to execute the business model
- Key resources to create value for the customer
- The partner network—or strategic alliances that complement the business model.
The next set of blocks focus on the customer. It starts with:
- The value proposition that showcases how a business venture clearly defines the value created for the customer and why the customers buy from one business versus another
- The needs of a customer segment (the target market)
- Channels—the distribution conduit for the product or service
- Customer relationships between the business and different customer and segments.
The final two building blocks revolve around the financial aspects of the business, including:
- Cost structure
- The revenue streams on how the business makes money.
But first…a word of advice before you start down the path of creating a viable business model. According to Guy Kawasaki, author and founder of Garage Technology Ventures, the only reason to go into business is to “make meaning.” If you remember this and nothing else, to make meaning and to “make the world a better place,” you will feel good about pursuing your own business.
–Debbi D. Brock, Assistant Professor of Entrepreneurship at Anderson University
Debbi is a guest blogger for the AU MBA Program.