Questions Opinions Debates | Business Model Concept: Confusion and Definition

What’s business model, precisely?

Categorized under Basics

“Confusion” is the word that comes to my mind whenever I think of the term Business Model. It is one of the most loudly discussed topics, especially since 1990s. Interesting part is that most (or should I say almost all) of the research literature over this topic contain two arguments without fault –

The first argument is somewhat like -
“A good business model is an essential ingredient of business success.”

And the second argument is somewhat like -
“Business model is a widely spoken but rarely understood concept.”

There are loads of research papers and published resources that talk about the concept of business model as well as the confusion over the topic; and often cause more confusion as different authors take different views.

A scenario reflecting this confusion is well illustrated in a paper from Osterwalder et al — The Theory of Business Models. In a survey conducted to know how different people understand the term business model, from 62 participants they received 54 different definitions! Moreover, the paper mentions two very important facts about divergent understanding of the term –

Technology-oriented and business-oriented people tend to define the term differently.
Most of the definitions can be categorized into two broad groups as value/customer oriented (outward looking approach) and activity/role oriented (inward looking approach).

Another misconception about business model is that it is considered as an attribute associated with a company e.g. Dell business model. Business model makes more sense when it is associated with a product than company as a whole. A company can have different business models for its different products.

So then what’s business model, precisely? Well, all important things not necessarily have to be complicated! In the simplest form, business model is nothing but seeking answers to only two but extremely important questions –

Who all are involved in making a product successful?
Do they have enough motivation to do so?

These are the questions that decide fate of a product more than anything else, ain’t it? As Joan Magretta perfectly points it out in the HBR article — Why Business Models Matter?, one needs to have insight into human motivations in order to have a fairly convincing answer to these questions. A business is basically a collaborative activity and its success depends on how effective the collaboration works out. A product essentially shares the same culture. Its success depends on effective actions and interactions among different actors involved in that collaboration like - producers, distributors, consumers, competitors etc. If there is no appropriate motivation present to any of these actors involved, we can’t expect effective contribution from that actor and eventually it’s gonna affect the product life-cycle. Now, it may sound a little weird, at first glance, but competitor is also an actor on whose actions success of the product depends. A negative motivation needs to be posed to this particular actor.

In short, what a good business model ensures, precisely, is that everyone involved has something in it and this fact in turn compels them to work together towards making that product successful, that’s it!