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What is a Business Model?

[Disclaimer: I am currently gathering academic knowledge about this topic. Please share me your views and papers on this topic.]

 

Although both terms seem similar, a business model focuses on the "process of creating value"; a business framework focuses on "the structure of assumptions and facts"

 

[Business Model]

Basically, a business model is the way on how a business creates value on a continuous basis. This also assumes on its ability to thrive among its current or future competitors. According to articles in Harvard Business Review,

 

  1. In The New, New Thing, Michael Lewis refers to the phrase business model as “a term of art.” — “All it really meant was how you planned to make money

  2.  Peter Drucker defined the term — “assumptions about what a company gets paid for”

  3. Joan Magretta, defines what a business model is in the article  “Why Business Models Matter,” as “at heart, stories — stories that explain how enterprises work (reference below)

 

There is no one definition but a business model is not just "doing better than others". A business model is one in which a core competency enables the business to create value. For example, better phones is not a business model for Apple, but the App store and iTunes store is its business model. A great search algorithm isn't the business model for Google, but the ability to use its software to create a network of Android-friendly devices is.

Business models may change over time. Microsoft's business model was to license its Windows software as a platform so it could sell its other programs. However, as the IT environment changed, it is now focusing on "providing efficient solutions on multi-platforms as a subscription service" as a business model. The same happened in Adobe as well.

Furthermore, we should keep in mind that a decent business model does not equal a big business. As long as the business model is solid the business will be "profitable".

 

[Business Framework]

 

A business framework is "a structure of assumptions and facts to guide the understanding of a business".

Is there a hierarchy in which there exists an overall framework? Probably not. Frameworks are based on different perspectives and assumptions. Ideally, different frameworks would yield the same result. But just as valuating a stock, different methods will result in different outcomes.

So, I believe that it is important to have a handful of frameworks to rely on and also understand each frameworks' assumptions. In these pages, I will discuss the most openly taught frameworks. As most information can be found on the internet, business textbooks and other sources, I may not thoroughly differentiate text the original source from my thoughts. However, I will attempt to record each source.

 

The frameworks I will discuss are:

  1. Grown-Share Matrix (Boston Consulting Group)

  2. McKinsey Matrix

  3. SBU System (Arther D. Little)

  4. -
    Five Force Model (Michael Porter)    Material : Competitive Strategy    Related

  5. Diamond Model (Michael Proter)

  6. -
    Strategy Canvas (Simon-Kutcher & Partners)    Material : Price-Profit Graph    Related

 

Reference

  1. https://hbr.org/2015/01/what-is-a-business-model

 

Originally written on April 25, 2017

Relocated and updated February 17,2018

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