Williams and Robert B. Eugene Goodson The Entrepreneur rj A Test for the Fainthearted Walter Kuemmerle A good business model begins with an insight into human motivations and ends in a rich stream of profits. Many Matter people — investors, entrepreneurs, and executives alike — bought the fantasy and got burned. And as the inevitable counterreaction played out, the concept of the business model fell out of fashion nearly as quickly as the. All rights reserved.
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Magretta, J. Why business models matter. Harvard Business Review May : Summary by James R. Martin, Ph. The purpose of this paper is to define these two concepts, and to provide examples to illustrate the significance of their differences. Every successful business organization has a good business model that involves a testable hypothesis.
A business model is a story that explains how the enterprise works. It answers questions related to how the business expects to make money, who its customers are, what the customers value, and how the business delivers value to the customers at an appropriate cost. Business models are variations of the generic value chain that include two parts: the activities associated with making something e.
It describes how the various parts of a business fit together. Understanding the model allows it to be tested and revised when necessary. American Express provides a good example of a successful business model. Before ATMs were invented travelers had a difficult time translating letters of credit into cash and worrying about being robbed. The model involved charging customers a small fee for the checks.
Merchants accepted the checks because they trusted American Express. The process was riskless because the customers paid cash for the checks and the normal cycle of cost-before-revenue was reversed since people paid for the checks before they used them. A successful business model may provide a better way than existing alternatives, provide more value to a group of customers, or completely replace the old way of doing business. It failed the numbers test.
Other companies like Priceline Webhouse Club failed the narrative test. Other examples include Sears one-stop financial supermarket model, EuroDisney, and Silicon Graphics interactive television. All three of these models failed because they were based on faulty assumptions about customer behavior. On the other hand, the auction model developed by e-Bay provides an example that passes both test. The e-Bay model succeeds because the internet lowers the cost of connecting vast numbers of buyers and sellers who work out the logistics of payment and shipment on their own.
The company carries no inventory, incurs no transportation costs, bears no credit risk, and none of the overhead normally associated with those activities. The narrative works and the numbers add up.
A Competitive Strategy A competitive strategy explains how an organization is different from its competitors.
A competitive advantage can be obtained when a company provides something no other company can provide, or delivers it in ways no other company can duplicate. Wal-Mart provides an example that illustrates the difference between a competitive strategy and a business model. Their model is simply discount-retailing, but this model had been around for years before Wal-Mart opened in It involves applying supermarket logic to the sale of general merchandise.
Dell Computers provides another example. This gave Dell an inventory advantage and allowed it to avoid the high cost of obsolescence that the other companies could not avoid. While most PC makers focused on the low-margin home market, Dell went after the more profitable high-margin corporate market. Their business model is the same, but their strategic choices related to products, markets, segments, and customers shifts to fit new competitive realities.
A business model tells a story that helps everyone in an organization grasp what the company is trying to create. As a result the model helps everyone see how to adjust their behavior to improve execution. However, many organizations adopt the same business model. A competitive strategy involves determining how to apply the model in different ways to create a competitive advantage. Understanding the distinction between the two concepts is fundamental to achieving successful performance.
The living company. Harvard Business Review March-April : Johnson, M. Christensen and H. Reinventing your business model. Harvard Business Review December : Kavadias, S. Ladas and C. The transformative business model: How to tell if you have one.
Harvard Business Review October : Mintzberg, H. Van der Heyden. Organigraphs: Drawing how companies really work. Harvard Business Review September-October : Porter, M. The Free Press. From competitive advantage to corporate strategy. Harvard Business Review May-June : What is a strategy? Harvard Business Review November-December :
What Is a Business Model?
People use them interchangeably to refer to everything—so they mean nothing. But no organization can afford fuzzy thinking about these fundamental concepts. A business model and a strategy are two different animals. Sure, the business-model concept unraveled after flagrant misuse by dot bombs. But when you build a sound model that complements your strategy, you equip your company to beat even your toughest rivals. For example, on-line grocery models failed because customers declined to pay substantially more on-line than in stores. Failing either test can prove fatal.
Why Business Models Matter
The article indicates the differences between business strategies and business models. The author indicates that the interchangeable use of business models with business strategies has rendered the use of the terms meaningless. The author therefore enlightens the audience on the significance of a business model. She further gives an account of what causes a business model to succeed or fail.
Summation of Joan Magretta’s ‘Why Business Model Matters’ Essay
It was still not clear that the model made sense. They are about identifying customers and competitors, their values and behavior. Writing in , the depths of the dot. And what does the customer value? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?
Electricity generation sources and distribution systems are drifting from non-renewable to renewable, centralized to decentralized and localized, and traditional grid systems to smart grid systems. New technologies nurture the concept of transformation of energy firms, all the way from energy production to electricity consumption. Smart grid systems are one of the disruptive and emerging technologies that might influence the entire electricity system. This disruptive technology demands a new business model which can be used to commercialize the new power distribution system and thus create value for all stakeholders, from production to consumption. The Smart grid has the potential to revolutionize the electricity industry if it is commercialized successfully. It allows information and communication technology firms to contribute with their modern technology to empower their consumers to regulate the usage of electricity.