Do you have a new business idea but don't know how to put it into action? Do you want to improve your current business model? Are you feeling overwhelmed by the prospect of writing a business plan?
A business model is simply a plan that describes how a company plans to make money. It explains your customer base, how you provide value to them, and the financial details that go with it.
In Joan Magretta's article "Why Business Models Matter," the business model is defined as "stories that explain how enterprises work." One cannot create a good business model without answering Peter Druckers' and the fundamental managerial questions: Who is the customer?, What does the customer value? How do we make money in this business?, What is the underlying economic logic that explains how we can deliver value to customers at a reasonable cost?
Specializing in business modelling, Magretta finds it useful to further define a business model in terms of the value chain. She describes the value chain as having two components:
One covers all of the activities involved in creating something, such as designing it, purchasing raw materials, manufacturing, etc.
The second includes all of the activities associated with selling something, such as locating and contacting customers, making a sale, distributing the product, or providing a service.
Also, a new business model may be based on developing a new product to meet an unmet need or on process innovation.
When comparing models, you enter the realm of strategy, which is often confused with business models. In "Why Business Models Matter," Magretta returns to first principles to make a simple and helpful distinction, stating that a business model is a description of how your business operates, whereas a competitive strategy explains how you will outperform your competitors. Beating your competitors could be accomplished by providing a better business model. Still, it could also be achieved by providing the same business model to a different market.
When creating a business model, the business model canvas is the tool to use.
The business model canvas allows you to define these various components on a single page. It was created by Alex Osterwalder and Yves Pigneur and published in their book "Business Model Generation" as a visual framework for planning, developing, and testing an organization's business model(s).
This canvas is a strategic management tool that allows you to visualize and evaluate your business concept or idea. With nine boxes representing various fundamental elements of a business, it outperforms the traditional business plan, which can span several pages by providing a much easier way to understand the various core elements of a business.
Alex Osterwalder, who has developed what is arguably the most comprehensive template for building those hypotheses, is firmly in the "a business model is a set of assumptions or hypotheses" camp. His nine-part part business model canvas is essentially an organized way to layout your assumptions about not only the essential resources and critical activities of your value chain but also your value proposition, customer relationships, channels, customer segments, cost structures, and revenue streams—to see if you've missed anything important and to compare your model to others.
You can use the Business Model Canvas to sketch out new business ideas or to visualize existing ones. The Canvas can be used in groups to create a shared language for better strategic conversations, or it can be used individually to structure your thoughts.
To ensure having all the elements needed for your strategy, start sketching out your business model.
Whether you work for non-profits, sports and recreation, health and wellness, or as an entrepreneur, how you use your business model results in how your product is perceived. With CINTA & Co., you will discover a winning business model narrative. The right tools will be delivered to you with a simple click. Subscribe to get our free content and be the first to hear about our updates!
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