The role of business models has recently received considerable attention both in practice and academia. In this article we briefly review the current debate and highlight a number of interesting insights regarding the value of business models and the purpose they serve.
What is a business model? While there is, surprisingly, no consensus on how to define a business model, most studies appear to agree that it is the construct that conceptualises how firms generate, deliver and capture value – the model that explains how financial value can be extracted from a technology, product or service.
In particular, the business model depicts how a firm makes money by specifying where it is positioned in the value chain and determines the design of the content, structure and governance of economic transactions so as to generate value through the exploitation of business opportunities. In so doing, it specifies the value proposition, the partners and channels through which value is generated and delivered, and the revenue model.
An interesting set of research studies by Doganova of Mines ParisTech and colleagues suggest that the design of models is particularly important for the development of entrepreneurial ventures. In fact, “the business model works as both a calculative and a narrative device. It allows entrepreneurs to explore a market and to bring their innovation – a new product, a new venture and the network that supports it – into existence”. It is suggested that business models can be therefore be fruitfully analysed as “market devices” that play an important role in the interactions with business partners and investors.
Management scholars “found that the stock market consistently values certain types of business models more highly than others. Specifically, [the study] found that in recent years, investors have favoured business models focusing on licensing intellectual property – such as Google’s business model – and a certain kind of highly innovative manufacturing – such as Arduino’s rapid prototyping or the largest 3D-pinting companies: 3D Systems, Stratasys and Exone”.
In today’s world, where product lifecycles may often have only a few months of shelf-space – particularly in the consumer, mobile and internet products, service and solutions sector – business models are often at the core of it.
Large corporations and corporate venturers are well advised to learn from young start-ups, since they often tend to follow and understand the needs of their friends in the same age bracket. This is particularly true in the emerging markets, where western internet companies have often failed, particularly in China.
Chinese companies typically look at some existing technologies, re-engineer it and add local features and include local services, and add a completely new business model on top, which has little to do with western revenue models.
This is particularly true in the area of e-commerce – Alibaba vs eBay – and in mobile gaming – Tencent, Shanda and others. By investing as a corporate venturer in innovative local start-ups, large foreign and local corporates can prevent very, very costly mistakes, while such investments may lead even to potential acquisitions or a new distribution channel, in order to get rapid access and traction in the market.
When considering an investment in a young and innovative company, financial backers, mentors and coaches should assist the entrepreneurs in the following three questions – why, when and how?
Why an analysis of the business model? On the one hand it provides a guide for the entrepreneurs in the definition of all the parameters related to the future business and its activities right from the beginning of the business creation project. On the other hand it provides a useful tool for investors to help entrepreneurs prepare the creation of their businesses, notably in the communication with the project’s stakeholders.
When should the business model analysis start? As soon as the business idea has been identified, entrepreneurs should start building their business model. The results of the work on the business model will end up being formalised in the company business plan. The business model must evolve constantly over the various stages of the company’s development, and structure relations with business stakeholders and decision-makers.
How can entrepreneurs be helped in the development of their business models? Financial backers and mentors and advisers should assist in building and testing the business models. It is in their own interest to understand the foundation of the company, which they are trying to help and end up investing in. The business model is becoming a central element in optimising the way entrepreneurs and their projects progress in tight collaboration with their investors, in order to improve the chances of business success.
In today’s increasingly global, complex and competitive world, companies looking for profitable sustainable growth need constantly to invent new competitive advantages. Innovation brings differentiation, and differentiation is essential to lasting success, where business model innovation is at the core of it.
Henry Chesbrough of University of California Berkeley puts it into perspective – a mediocre technology pursued within a great business model may be more valuable than a great technology exploited via a mediocre business model.