On Business Models
Business models contain the essence of what a business is, what a business will do, and how it will sustain its life. A business model is the blueprint of how a company is constructed. It is the most vital documentation with respect to its existence. Business models are widely discussed given that businesses, industries, and markets can originate from business models, which have investment implications that impact the financial health and wealth of vast proportions throughout economies. Regardless of the type of business, be it a high-speed agile entrepreneurial startup venture or an established monolithic publicly quoted corporation, the technicalities within which a business model is constructed will seem unique; however, the fundamental intent, purpose, and objective will largely be the same. To begin a detailed analysis and to garner a proper understanding, it is important to develop an understanding of what is a business model.
Business models are the structures upon which companies are constructed in order to conduct profitable activities. They bear, “the essence of value creation in business, beginning with the articulation of a customer need and the associated revenue stream” (Willman, 9). Thus, they answer what we will do, for whom will we do it, and how we will profit. Canonically, a business model is the, “focal firm’s core logic for creating, delivering and capturing value within a stakeholder network” (Jensen, 67). Zott and Amit further the logic, stating that a business model is, “a system of interdependent activities that transcends the focal firm and spans its boundaries” (Willman, 5). Upon transcendence, in the process of striving toward perfecting the products or services, a business can develop a competitive advantage. If it is difficult to be copied by competitors, the opportunity to distinctively create value for customers increases, raising their switching costs, and creating a barrier to entry. Willman states that, “An effective business model generates value for customers and thus for internal stakeholders such as investors and employees” (Willman, 5). Therefore, the objective of a business model is to elucidate how to successfully perform business and how that business will create inimitable value, all lending toward positive externalities. Given the business model’s credence in the genesis and existence of a business, it has become an important topic of discussion.
Understanding the importance of a business model is paramount to business and social science understanding. A business model is to a business what the soul is to a human. It is the “core hypothesis about how the firm works” (Willman, 9). Thus, everything that stems from a business is a derivative of a business model’s quality. Business models answer foundational questions such as ‘who is the customer?’; ‘what does the customer value?’; ‘how do we make money?’ (Magretta, 2002). Logically proceeding, a myriad of implications results. Willman states that business models were originally formulated to look at which types of internet-based businesses that ‘boomed’ might survive the crash and develop into successful businesses (Willman, 4). A business model can be assessed in a correlative approach indicating successes and failures for an investor to infer what ‘boom’ may be lurking. Willman elaborates on pivotal questions that must be asked, stating, “First, was the business capable of developing a revenue stream based on customer need? Second, could the business capture this revenue stream? Third, could it do both things while controlling costs? If the answer was ‘yes’ to all three questions, the business could be said to have a potentially viable business model” (Willman, 4). This assessment lends to preventing the potential proverbial rude awakening. Through the advent of technological advancement and digitization, there has been a proliferation of businesses through applications given their favorable economies of scale. New industries altogether have emerged. This is the nature of the modern services-oriented firm, where a smaller number of people can subsume a larger market capitalization than in past waves of industries. A business model therefore must reduce complexity, create transparency, and convey a narrative to employees and the public. What is more, research states that business models as concepts and constructs refer to the value architecture of businesses, incorporating elements of value creation, customer value delivery, customer acquisition and retention, and profit conversion (Ghezzi, Cavallo, 2). This emphasizes the importance of a business compounded with the integrity of its business model. Willman states that, “The model must contain a product, service, or bundle of the two that customers are willing to pay for such that a reliable revenue stream is generated” (Willman, 7). A business model illustrates how revenue will be generated and value will be created for a business. This can immediately be observed within the startup sector.
Regarding entrepreneurial startup ventures, business models are vital to convey accurate narratives of classification and purpose. Magretta argues that, “A good business model remains essential to every successful organization, whether it’s a new venture or an established player” (Magretta, 2002). A story defined within a business model must be articulated to establish venture funding, which determines a precise market-facing valuation. The business model illustrates a startup’s place in the market (as retail), as well as the rhetoric for the delivery methodology as a categorization (as an application platform). Business models provide focus, which, especially at inception, is necessary for the sake of impetus. It also establishes a revenue mechanism model that, “focuses on pricing and customer switching costs, channels to market, and interactions with the customer” (Willman, 7). This lends to high switching costs, which fortifies customer loyalty, and raises barriers to entry. Theoretically, this would establish a startup’s place in the market, which is derived from a customer orientation. Research states that startups have a significant advantage in speed to market, allowing them to bring innovations faster than traditional public corporations (Seggie, Soyer, Pauwels, 155). Startups, such as Airbnb, tend to be nimbler than the legacy corporation counterparts, such as Hilton.
Airbnb has entirely reshaped the hospitality / hoteling industry. A dilemma arose where there was an insufficient quantity of hotel rooms available during peak periods, and Airbnb provided a solution by using people’s unoccupied apartments (Chua, Chiu, Bool, 20). This expanded the sharing economy, whose key characteristic is providing opportunities to individuals in exchange for their underutilized assets; this efficiently equilibrates supply and demand (Chua, Chiu, Bool, 23). Airbnb’s business model is more efficient relative to its hotel counterparts (less underutilized capacity). Their value has skyrocketed to a valuation of $38 billion due to their nimble and innovative business model; they now own 20% of the US consumer lodging market (Molla, 2019). Their current market share is twice as large as Hilton Worldwide Holdings and Marriott International group” (Chua, Chiu, Bool, 20). There is no place like home, and some people prefer a homey experience. Particularly millennials oftentimes do not necessarily want to simply visit a destination; when they travel, they want to be a part of the community. This preference is supported by a track record of over 3 million listings, 200 million guests, and a presence in over 191 countries worldwide (Chua, Chiu, Bool, 29). From a technological perspective, Airbnb uses an innovation-centric business model that drives customer engagement instantaneously, which consequently disrupts traditional methods (Chua, Chiu, Bool, 23). It is more nimble than traditional hoteling giants and does not need to rely on traditional infrastructure and acquisitions; it brilliantly leverages existing assets. That said, the importance of business models extends beyond startups.
On the opposite end of the spectrum, it is equally imperative for large publicly quoted corporations to have established business models. Research supports that, “the Porter approach focuses on competitors, whereas the business model approach is far more internally focused on the assets and capabilities of the firm” (Willman, 8). An articulable business model serves as an advantage in the intense topography where public corporations compete. Business models are introspective and must be malleable for a corporation to be dynamic. Furthermore, “success often hinges on management’s ability to tweak, or even overhaul, the model on the fly” (Magretta, 2002). An adaptable plan contributes to a corporation’s relevancy, fending away competition through its narrative, brand, marketing, and delivery. Flexibility is a goal; however, research showcases that, “although business models need to evolve to remain competitive, it is very difficult for a business completely to change its business model with a good chance of success” (Willman, 5). The corporation’s essence must remain intact, but the delivery methodologies leveraged, as well as innovative platform categorizations are subject to change. Moreover, “While legacy companies should not imitate startups, they often need to evolve their business models to deal with the competition from startups, particularly with regard to the speed of innovation” (Seggie, Soyer, Pauwels, 155). This serves as a protective measure against new entrants, fortifying a corporation’s place in the market and their customer base. Research supports that, “the size of the customer base itself may be an important element in the success of the business model” (Willman, 7). A customer orientation while iterating innovations toward favorable products or services lends to loyalty, and, along with a unique blend of offerings, increased competitiveness. Magretta writes, “When a new model changes the economics of an industry and is difficult to replicate, it can by itself create a strong competitive advantage” (Magretta, 2002). Willman states that, “innovation, key to business model success, is absent from the Porter model (Willman, 8). Innovation is inherently difficult if not impossible to replicate, and coincidentally it comes from within, hence being a prevalent theme in business model construction of Netflix.
Netflix is a profound example of how to disrupt an industry with a business model, and how that business model can evolve over time into something entirely new. Netflix launched as a traditional pay-per-rental DVD service that offered delivery by mail (Rayna, Striukova, 25). It became disruptive once it began innovating its business model. The first step was to become an all-you-can-consume subscription service. The business model then evolved its distribution channels and pricing model displacing video rental chains, such as Blockbuster. They then radically altered into a streaming service, disrupting its own business model (Rayna, Striukova, 25). The market Netflix occupied roughly remained intact (it rented videos), but its categorization dramatically changed (it became a streaming service). Viewing streaming as its future business competency, Netflix focused on its recommendation system, enabling the company to develop essential core competencies that have been driving subsequent business model innovations (Rayna, Striukova, 26). The categorization of the business is central, in that Netflix began looking like an information platform, leveraging its data mining technology through a data-centric algorithmically driven business model. Research dictates that, “With this recommendation system, Netflix improved both the value proposition (as the recommendation system is a service bundled with Netflix’s subscription offer) and its capacity for value creation - through the strengthening of its core competencies (the algorithm), key resources (the data collected), and value networks (ratings supplied by users)” (Rayna, Striukova, 26). This focus led to a development of core competencies driving business model innovations such as its foray into original content algorithmically systematized within Netflix’s database. Hypothetically, if the competition was able to steal this algorithm, they still would not have access to Netflix’s original content as well as its gathered analytics. This creates a unique bundle of service and competencies that is a massive competitive advantage. Research shows that, “Netflix has never been afraid to make dramatic changes to its business model and introduce new ones, even when that has meant cannibalizing its current offering” (Rayna, Striukova, 27). Businesses that have a proclivity to innovate and disrupt their own business models tend to have a lasting presence.
A business model provides an introspective of a business’s type, which expands its definition beyond merely the sector space it occupies. This broadens a business’s purpose and provides clarity as to what and how a business performs its transactions. Business models detail the type of product or service the organization will provide, whom the target audience will be, and how it will orient itself toward reducing costs and earning profit. A business model’s definition justifies its importance, and its importance justifies why it is broadly discussed. A business model is the spirit within an organization. It can indicate whether a company will fail or succeed, which lends to investing, employing, and funding ramifications. The proliferation of businesses whose primary competency is delivered through applications has broadened markets, to the extent where new industries altogether have emerged and are emerging. Airbnb and Netflix have debatably created and definitively broadened the ‘recreation’ industry through platform interplay, recreating their markets and iterating innovatively upon themselves. All businesses are in pursuit of the same thing from prospective consumers, their time. Through a nimble, innovative approach, documented within a business model, both startups and corporations can ensure they consume as much of this fleeting priceless resource as possible. It is impossible to strategize without a business model, as it is impossible to go to market without a business model, as it is impossible to exist without a business model.
?References
Chua, Evelyn, Jason Chiu, and Nelson Bool. "Sharing Economy: An Analysis of Airbnb Business Model and the Factors That Influence Consumer Adoption." Review of Integrative Business and Economics Research 8 (2019): 19. Web.
Ghezzi, Antonio, and Angelo Cavallo. "Agile Business Model Innovation in Digital Entrepreneurship: Lean Startup Approaches." Journal of Business Research (2018). Web.
Jensen, Anders. "Do We Need One Business Model Definition?" Journal of Business Models 1.1 (2013): 61-84. Web.
Magretta, Joan. “Why Business Models Matter.” Harvard Business Review (2002). hbr.org/2002/05/why-business-models-matter.
Molla, Rani. “American Consumers Spent More on Airbnb than on Hilton Last Year.” Vox.com, Vox (2019). www.vox.com/2019/3/25/18276296/airbnb-hotels-hilton-marriott-us-spending.
Rayna, Thierry, and Ludmila Striukova. "360° Business Model Innovation: Toward an Integrated View of Business Model Innovation: An Integrated, Value-based View of a Business Model Can Provide Insight into Potential Areas for Business Model Innovation." Research-Technology Management 59.3 (2016): 21-28. Web.
Seggie, Steven, H. Soyer, and Emre Pauwels. "Combining Big Data and Lean Startup Methods for Business Model Evolution." AMS Review 7.3 (2017): 154-69. Web.
Willman, Paul. “Business Models.” Management Theories. Open School of Management (2018): 1-12. Pdf. Web.