A CTO's perspective
Wherever you turn today business owners, leaders, social media channels, books, blogs, and entrepreneurs talk about business models. It is a trendy term thrown around by so many and to such an extent that the power of a business model seems forgotten.
As a reminder, we ask and answer, four questions. What is a business model? What does a business model look like? Why are business models so popular today? Why every business, regardless of type, size, age, wealth, or industry, needs at least one.
What is a business model?
In 1973 Douglas T. Ross, an accomplished computer scientist, wrote about scientifically modelling a business. Since then the business model has been tested, updated and applied successfully many times by scientists, business owners and leaders globally.
The model (or graphic) conceptualises the core elements of a business regardless of type, size, age, wealth or industry. These elements detail how a business makes money; who the customers are and what channels are used to reach them; the unique value the business provides to customers; who to form strategic relationships with; what key activities the business performs to deliver this value and collect revenue; and how these elements are measured.
Most businesses have more than one model, for example, a model each for innovation, change, technologies, strategic partnerships and acquisitions. Professor for Technology Management at St Gallen University, Dr. Oliver Gassmann, in one of his academic papers written in 2014, lists 55 different types of business models! Some you may recognise as popular today. Freemium – where some service(s) are free, upgrade for additional functionality. Subscriptions - a monthly fee is charged for a set period, starting at an affordable price point, with the option to increase or decrease over time. E-commerce - the sale of products/services online. Performance based - a customer pays on results.
What does a business model look like?
Business models can either be explicit as written or drawn or implicit, unspoken or undocumented, yet no less powerful. Explicit business models can look different as seen in the four examples below.
Figure 1 Four examples of how business models can look different.
Why are business models so popular today?
Carl Sagan, famous scientist and author, said “you have to know the past to understand the present”.
Before 1999 large corporates had secretive R & D departments where scientists worked for years, decades even, to create the ‘next new thing’. Occasionally a ‘new thing’ would reach the local market, usually at a high price. For example, in the early years of Dyson vacuum cleaners the technology was secret and the vacuum cleaners expensive.
However, after 1999, the adoption of digital technologies for everyday use changed our world. In the new world teenagers, students, parents, anyone with an idea, started a new type of business with little or no capital using digital technologies. Google and Facebook are two well-known examples.
Government campaigns (such as Digital Britain) drove technology infrastructure, development, use and e-skill training, to stimulate economies.
Scientists, technology enthusiasts and self-taught developers worked together openly and passionately on projects (often for free), combining scientific knowledge and skills to find low cost digital solutions to everyday problems. For example, consumers could share music for free through Napster rather than pay High Street prices for music.
Since 1999 consumers have had a continuous flow of new, exciting digital tools, devices, products and services from around the world, delivered in a convenient way for the individual lifestyle. Consumers can pick and choose who to spend their money with rather than remain local. Therefore, consumers’ buying expectations change continuously with every wave of new technology that occurs every 12 to 18 months.
Combined, these factors have created today’s changeable business environment, where the rate of change is rapid and continuous rather than slow and planned as in previous years. A dynamic business environment means traditional business cultures, management tools, techniques and methods are far less effective in our current world. Additionally, most businesses do not have the necessary high level of technological knowledge, in house capabilities and skills to know what decisions to make, so are uncertain about how to adapt successfully and remain competitive, where competitors are global and unknown rather than visible in the local area.
We have all read about the many casualties unwilling, or slow, to adapt. Blockbusters for example, remained unchanged whereas Netflix adapted. Seen a Blockbuster store recently? Thomas Cook, Focus DIY, JJB Sport, BHS, Staples, to name others on a very, very long list to date.
So, today’s business owners and leaders need a strong tool that supports nimble and adaptable actions, informs sound decisions to drive the business forward and to remain very attractive to customers, avoiding the loss of market position to unknown competitors.
Why every business needs a business model
Every business strives to be attractive to customers because, at the risk of stating the obvious, without customers paying for services and products, there is no business. Here are three real world examples of how a small business model change can have a profound effect on raising capital, improving competitive advantage and market positioning, keeping the business focused, while positively affecting their future.
A change to the revenue stream, a business model element, from traditional hourly rates to monthly subscription plans could make services more attractive to your customers and to your competitor’s customers. Together existing customers remain loyal, the customer segment increases to include competitors customers, and it reveals a competitive advantage while clearly demonstrating a unique position in the market.
Often, where business changes are required, business owners pitch to investors for additional capital. Investors, technologically informed or not, are able to understand the business immediately when presented with a simple graphic business model that explains the business rather than a boring, heavy duty business plan. Greater understanding improves chances of attracting investment for future growth and change.
As a simplified example, Asda has a unique value proposition to “save money, live better” so, if a high-end tool manufacturer approaches the Asda buyer with an expensive tool kit for potential resale in store, it would be turned down because it conflicts with Asda’s unique value proposition.
Precise, strong business model elements, such as the unique value proposition, can be powerful for keeping staff, management, investors (stakeholders) focused on the big picture and culture of the business, encouraging everyone to work towards a common goal, thus influencing and informing day to day decisions and easing the people management function.
In all three examples the business model can be used to clearly and nimbly identify areas of adaptability within the core business.
To sum up, a business model is a simple scientific graphic displaying the core elements of a business regardless of type, size, age, wealth, or industry. Four examples of different business model designs were presented, each covering the same core elements in graphic form. Recent history has proven that a business model is a necessity today to continuously adapt to our current dynamic business environment where uncertainty, fast change and significant competition are constant. Finally, three real world examples highlighted the positive and substantial impact of small business model changes on the future of any business, without destroying the established business in the process.
Whether you are a sole trader, start up, established SME, or global corporation, a business model could mean the difference between your business thriving in our uncertain world or becoming a fond memory as a business that once was.
Business Strategy Hub https://bstrategyhub.com/tesla-business-model-tesla-business-model-canvas/ (12 October 2020)
Digital Britain https://www.gov.uk/government/publications/digital-britain-final-report https://digital-government.co.uk/ (12 October 2020)
Dyson https://www.dyson.co.uk/en (12 October 2020)
Gary Fox https://www.garyfox.co/apple-business-model/ (12 October 2020)
Gassmann, et al. (2014) The St. Gallen Business Model Navigator (12 October 2020)