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June 23, 2010
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July 23, 2010
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What is a business model:
A new approach — continued
Overall definition
We like and agree with the above authors who define a business model as being about how a business creates, delivers and captures value. We refine this definition to state that a business model is the core design of the business, specifically the way it is designed to create, deliver and capture value.
Thinking in terms of design is powerful. A good business model will be simple and elegant, and it will work. Its design will be complete in every important respect. Each element will be carefully thought through and individually crafted, and the sum of the parts will integrate perfectly, harmoniously and effectively. By contrast, a poor business model simply doesn’t work. It will either lack some critical elements, comprise the wrong elements, or comprise elements that don’t work well together.
Key elements
So what are these elements? More specifically, what are the primary elements of a business model? In our approach there are five primary elements, each comprising several subsidiary elements:
- Markets – this consists of the markets in which the business chooses to compete, and where the business chooses to be positioned within the market’s value network. This includes the customers and needs the business chooses to address, the companies with which it competes, and the companies with which it partners. This element is fundamentally about gaining a deep understanding of markets, customers, competitors and partners, and deciding how to position the business for maximum advantage, as a foundation for the rest of the business model.
- Products – this element is about defining the business’ offering – its value proposition – to its target customers. Essential to this element is thinking about the offering as holistically as possible. It thus includes defining and distinguishing between the core technology, platform and application features; defining the “whole” solution including third party complementary features; and defining the total customer experience and relationship. It also includes the other elements of the value proposition both to the customer (pricing and positioning) and to the business (margins and protection of IP).
- Processes – this element consists of how the business creates, markets and delivers its products and services to its customers. These three core processes – research and product development, sales and marketing, and operations and customer support – are the fundamental engine of the business. In addition, two other core processes must be defined - how the business manages (through strategic and operational planning and control), and how it supports (through HR, IT, finance, legal and other support services), these core activities. Like with the other elements, our definition of processes is holistic: it includes repeatable processes and one-off key initiatives, internal skills and assets, and external supplier and channel partners.
- People – as discussed above, this element is about defining the core stakeholders in the business – the management team and key employees, investors and the board, and key strategic partners. It begins with defining which stakeholders make sense for the business, and how to attract them. It includes defining their joint vision for the business, how they work together, and how they make decisions. And it includes thinking through what they each contribute to the business, and how they each share in the value created and captured by the business.
- Economics – this element is both the result and the enabler
of the other four elements. It comprises the key components of the
economic model - revenue, costs, investment, funding and cash flow.
Central to this element is thinking deeply about the core drivers
in the other four elements, how these impact the business’ economics,
how they interact with each other, and what tradeoffs must be made
between different drivers. Ultimately, the overall focus of the business
model is about optimizing its economics – how value can be
maximized from limited resources, and how the business can capture
its fair share of that value to share amongst its stakeholders .
Comparing the approaches
By comparing the approaches discussed in this paper, one can see how in many respects the different approaches encompass similar elements. At the next level of detail, the differences become more apparent, but in most cases it is more a matter of how primary and subsidiary elements are grouped, rather than whether or not they are part of the business model.
That being said, we think a quick glance at this table illustrates the power and simplicity of the Blue Mine Group model compared with the other approaches.
| Blue Mine Group | Chesbrough | Hamel | Skarzynski and Gibson | Johnson et al. |
Osterwalder and Pigneur | Mullins and Komisar |
| Markets | Market segment Value network | Core strategy Value network | Who do we serve? | Customer value proposition | Customer segments | Revenue model |
| Products | Value proposition Competitive strategy | Core strategy Customer interface | What do we provide? How do we differentiate and sustain an advantage? | Customer value proposition | Customer relationships Value propositions | Revenue model, Gross margin model |
| Processes | Value chain, Competitive strategy | Strategic resources, Customer interface, Value network | How do we provide it? How do we differentiate and sustain an advantage? | Key resources Key processes | Channels, Key activities, Key resources, Partners |
Operating model |
| People | ||||||
| Economics | Revenue, costs, margins | How do we make money? |
Profit formula | Revenue streams, Cost structure | Revenue model, Gross margin model, Operating model, Working capital model, Investment model |
To date we have found the new approach to the business model that we have developed to be effective and successful. It is built on the work of leading thought leaders like those discussed in this paper, and it also meets the test of “simple, clear and comprehensive”. In practice, we have found that entrepreneurs, managers and investors quickly grasp this approach. It also translates easily into accepted business plan formats.
In summary, the new approach to designing and implementing a business model discussed in this paper provides an elegant, simple and powerful diagnostic toolset and decision making framework for maximizing the value of innovation.
* * *
Additional reading and resources
Open Innovation
http://www.amazon.com/Open-Innovation-Imperative-Profiting-Technology/dp/1578518377
by Henry Chesbrough
Innovation to the Core: A Blueprint for Transforming the Way
Your Company Innovates
http://www.innovationtothecore.com/thebook/intro.cfm
by Peter Skarzynski and Rowan Gibson
Leading the Revolution
http://www.amazon.com/Leading-Revolution-Gary-Hamel/dp/0452283248
by Gary Hamel
Reinventing Your Business Model (subscription required)
http://harvardbusiness.org/product/reinventing-your-business-model/an/R0812C-PDF-ENG
by Mark Johnson, Clayton Christensen and Henning Kagermann:
Business Model Generation
http://www.businessmodelgeneration.com/
by Alexander Osterwalder and Yves Pigneur:
Getting to Plan B: Breaking Through to a Better Business Model
http://www.amazon.com/Getting-Plan-Breaking-Through-Business/dp/1422126692
by John Mullins and Randy Komisar:
About the author
Michael Lurie is Founder and CEO of Blue Mine Group in San Diego, CA. Blue Mine Group specializes in designing successful business models for technology innovation.