Business Model

 
Copyright: Firend Al. R. (2016)



Introduction to Business Model (Extracted from: Firend, Al. R. (2018) Business Model simplified with examples from global companies. CreateSpace.

Companies and society has always been the rubrics that holds the very make up of business activities. Combined, these two forces form the essence of contribution to what makes economy, shaping our daily activities, and the formation of business cycles. Given the ever-increasing complexity of the global marketplace, business (exchange of good and services, manufacturing, farming, production, distribution, sales and consumption) is rooted in the way we live and how our societies and ultimately nations, progress. A viable, efficient and effective business model is vital to organizational success of failure. Business model is not just a theme of focus when reacting to a crisis, or simply the operational structure of a given enterprise. Business model is the manifestation of the very existence of the organization, business, firm, group, agency, governmental department or a person with a purpose of providing a service to others.

This book attempts to provide numerous examples of companies from around the world, to show how various entities are operating and shaping the global economy. To fully comprehend such themes into practice, one need to look at various market players by examining how they structure their operations and conduct everyday tasks in pursuit of their objectives. This book analyses numerous companies’ business modules, and attempts to illustrate to the reader the varying operational mechanism that makes them succeed. Business models of some big name companies have been examined here to illustrate how big as well as small firms, structure themselves to provide solutions of value to others. The cases in this book also detail the strategies (actions) ^[1] taken that contributes to the success of the firm and ultimately, reshaping the business model altogether. The biggest lesson to mention here is that companies must constantly change their business model to survive in the marketplace. Those who don’t manage to evolve their business models, or reinvent themselves, are doomed to become extinct and irrelevant. Those who do not manage to change their business model to remain relevant to their marketplace and consumers, they disappear and get replaced by others with more relevance to the consumer needs. For example, Kaiser was the largest ship builder in the U.S.A. during World-War II, today they are one of the top five health insurance companies. Tesla was one of the first electric car manufacturers. Slowly, they are shifting to electric energy providers rather than just electric car company. Uber started as an intermediary between drivers and passengers, now they are redefining the concept of transportation. These companies understand the importance of redefining their business models constantly to remain relevant, by venturing into new unsaturated areas of consumer demand. While the reader gets the opportunity of examining various business models, let it not escape your attention as to how these businesses need to further restructure their business models to maintain future competitive advantage. 

What is Business Model?

Different people define the concept of business model differently. For the average person, business model merely describes the way in which a firm makes money (Krehmeyer, 2012). Peter Drucker (1994) coined the concept by describing it initially as the “theory of business”. Some see it as the company plan for generating revenues, some see it as the structure of operations and how to organize various activities to provide services, others define it as the architecture of the organization and division of resources to generate profits. Michael Lewis refers to the phrase business model as “a term of art” (Ovans, 2015). All are adequate views of what a business model is. I however, tend to favor Thompson et. al. (2013) interpretation of what business model is, which they describe as being value proposition and a profit formula. The value proposition consists of satisfying consumer’s wants and needs through value offering to generate profits.

A business model can be simple or complex. For example, a restaurant business model is to generate revenues by cooking and serving food to hungry customers. A production business model might not be so simple, as there are many ways in which companies can generate revenue. On the other hand, a fashion or an electronic company may need to keep changing their model to survive with the changing consumer needs and wants in addition to changing market conditions and requirements.  Such changing conditions are highly impacted by evolution in technology, which is causing rapid disruption to all existing business models. The business model diagrams in the next pages explains this idea. Cases in this book don’t stop at highlighting the business model only, but explains both factors that contribute to the success of a given company and the challenges they face. In fact, one of the most valuable lessons I learned from my consulting days is that what triggers the stagnant conditions of so many large and successful organizations is that their business model is no longer viable.

Every organization then, big or small, has a theory of their own business existence. Some are very successful by being conscious of their business structure and adjust their resources and strategies according to changing demands and market conditions. While others are less successful because either they fail to understand their market (consumer demands, market segment, wants or needs to serve, impact of regulations, globalization, technology, or emerging changes in their environment), or they failed to compete, primarily because of errors in human judgment (management and/or personnel).

Most importantly, failing to adapt their business model to accommodate constant changes in the variables described earlier. Since everything is subject to change, business models must evolve overtime and change to accommodate changes that affects the business. As simple as it may sound, most companies large or small tends to go through a long process of trial and error, to get their business model right. For those who get it right the first time by determining an urgent need and fulfill an existing demand while generating profits, they can not escape the point of saturation and decline in their business. Hence, they need to re-examine the variables described above that makes up their business model, and strive to redesign it in a way that give them a competitive advantage and more relevance to consumer needs. As we approach the forth industrial revolution of Artificial Intelligence, (AI), the rate and phases of change will be revolutionary in the coming years. Andrew McAfee and Erik Brynjolfsson from the MIT Initiative on the digital economy, rightly suggest that Existing business models rely on mind over machine, and product over technological platform. However, the new digital economy led by AI promises a reversal in such traditional business model. Mew Business models will be led by machines over minds and platforms over products.

Dr. Firend Alan Rasch, 2017