Defining the Business Model
Margretta starts out by asking the fundamental question presented by Peter Drucker: Who is the customer and what do they value? Anybody who has taken an elementary business course must have heard of this question before. It is very surprising to know that many firms fail to create value because they were unable to answer and act upon the answers to these two simple and straight-forward questions.
As defined in ‘What Management is,’ a business model is a set of assumptions about how an organization will perform by creating value for all the players on whom it depends. Given in the Dell example, a business model is a result of selecting the best model from a pool of many
alternatives. Traditionally, Dell has driven its profits through the innovative strategy of selling directly to customers. They only started building the product after they were ordered. After the customer placed orders, the factories (owned by the company) would assemble the parts and would be shipped directly from there. This enabled Dell to reduce unnecessary inventory and improved Dell’s cash flow. This unique business model differed significantly from the majority of players in the PC manufacturing industry. It offered value to a different set of consumers in a different way.
Also, the American Express example shows that, a business model can form new demand. Recognized as one of the most successful business models of the 19th century, American Express created traveler’s checks, proposing to the market an innovation in carrying money.
A business model is not a static entity. It is theory that is continuously being tested in the market. From the Euro Disneyland example, the managers of Disney thought that they can organize its Euro Disney just like the already existing American theme parks. However, this assumption failed, because the life pattern of Europeans and Americans are different. Only after a failure and modification of the original model did Euro Disney see customer satisfaction. This shows that organizations should change its model when they see inconsistencies.
Whether a business model is successful or not depends on the process with the customers. Managers must pay attention to the feedback loop and constant modify and improve the business model to better fit the industry environment, the firms’ specific strengths, and consumers.
Although many successful business models seem to have come about by accident, I agree with Magretta that business modeling is a scientific method in which where you start out with in-depth analysis and a hypothesis. This hypothesis is then implemented, tested, and revised if necessary to shape a better model.
If a business model explains how a company is operated and how all the detailed components fit together, than ‘strategy’ takes into account the competition. It explains how the firm will outperform its rivals. A good strategy is one that is unique and others cannot copy or follow.
As seen in the Wal-mart example, a clear distinction can be made between a business model and strategy. Wal-mart did not have a different business model. The concept of low price retailing started way ling before Wal-mart even showed...