How to design a winning business model

There has never been as much interest in business models as there is today; seven out of 10 businesses are trying to create innovative business models, and 98% are modifying existing ones, according to a recent survey.

However, most businesses still create and evaluate business models in isolation, without considering the implications of how they will interact with rivals’ business models. This narrow view dooms many to failure.

Moreover, businesses often don’t realise that business models can be designed so that they generate virtuous cycles - similar to the powerful effects high-tech firms such as Facebook, eBay, and Microsoft enjoy.

These cycles, when aligned with business goals, reinforce competitive advantage.

By making the right choices, businesses can strengthen their business models’ virtuous cycles, weaken those of rivals, and even use the cycles to turn competitors into complementary players.

This is neither strategy nor tactics; it’s using business models to gain competitive advantage.

Indeed, companies fare poorly partly because they don’t recognise the differences between strategy, tactics, and business models.

<h4>Three characteristics of a good business model</h4>

How can you tell if a business model will be effective? A good one will meet three criteria:

1. Is it aligned with business goals
The choices made while designing a business model should deliver consequences that enable an organisation to achieve its goals.

This may seem obvious until you consider a counterexample. In the 1970s, Xerox set up Xerox PARC, which spawned technological innovations such as laser printing, Ethernet, the graphical user interface, and very large integration for semiconductors.

However, Xerox PARC was notoriously unable to spawn new businesses or capture value from its innovations for the parent due to distressing lack of alignment with Xerox's goals.

2. Is it self-reinforcing?
The choices that executives make while creating a business model should complement one another; there must be internal consistency.

If, ceteris paribus, a low-cost airline were to decide to provide a level of comfort comparable to that offered by a full-fare carrier such as British Airways, the change would require reducing the number of seats on each plane and offering food and coffee.

These choices would undermine the airline's low-cost structure and wreck its profits.

When there's a lack of reinforcement, it's possible to refine the business model by abandoning some choices and making new ones.

3. Is it robust?
A good business model should be able to sustain its effectiveness over time by fending off four threats. They are:

Imitation: can competitors replicate your business model?

Holdup: can customers, suppliers or other players capture the value you create by flexing their bargaining power?

Slack: organisational complacency

Sub-situation: can new products decrease the value customers perceive in your products or services

Although the period of effectiveness may be shorter these days than it once was, robustness is still a critical parameter.

Business Model Canvas - a wonderful tool for you

The Business Model Canvas is a fabulous tool that has been created by Strategyzer and is available for FREE DOWNLOAD from their website.

You can also download a PDF from here  (1mb).

This short video shows you how to complete the Canvas.

And of course, if you need more information, then you can also buy the Business Model Generation Book, which I refer to constantly.

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Last modified onThursday, 23 October 2014 05:46
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