Value of simple business models

What is a business model?
Why every business needs a 'neat' business model?

The concept of business model is not always clear to many business leaders. I have even run into senior level executives of Fortune 500 companies that have only a hazy idea of what a business model is. Almost everyone knows about all the major elements of the business model (though usage of several terms is pretty standard, and quite acceptable), not many understand the framework in which the key elements need to exist and tie together with each other. In addition to that, it should also be understood that a business model is not a business plan. You will provide an outline of your business model in your business plan, but the two are totally different.

In my opinion, a business leader should be able to describe her or his company's business model on a single piece of paper in way it makes sense to a sixth-grade kid. If that is not possible, something is terribly wrong with your business model and you need to fix it. And if you started off with a simple business model and it became complicated later on, you need to simplify by destroying it. Jack Welch used to call it "destroy-your-business" and Ed Zander recently said, "At the height of success, break your business". It is perfectly fine to break a business into more than one so that they both have simple business models. (Related article: Keep your business model flexible)

So what is a business model?

Definitions are always tricky, but in very simple terms, a business model (also called a business design, only rarely though) is the mechanism by which a business creates value (or in other words, makes money). A simple definition!

I am a big fan of simple business models. That is why I like the business model of that gas station that sells only gas. I simply do not think it is a great idea to add car wash, oil change, and a convenience store to a gas station business model. It is desirable to add all of these to exploit customers who might need these conveniences at one location but these should be run as independent businesses. What you need to run a gas station is totally different from what you need for a convenience store. What I am saying is that an enterprise can have many lines of businesses, but these should be organized in a manner that each can have its own simple business model. When employees are being asked to pump gas, check your oil, wash your car, and sell soda, it just makes business messy. An example of a messy business model is General Motors. It has stopped being an automobile company. In fact, major portion of its earnings are derived from non-automobile activities. And an excellent example is the business model that Warren Buffet uses. Leave each business alone and let them stay simple the way they are. (Related article: Are old business models under threat due to outsourcing/offshoing?)

There is another very important issue to be never forgotten about a business model: all the elements of the business model should support each other and never run counter to each other. If components of a business model tie together strongly, you will have a very neat business model that will make sense to your board of directors, employees, customers, and suppliers.

The framework that I have developed to view a business model has three levels, as shown in the chart.

The first level provides the foundation of a business: how do you organize your business? The second level components of the business model are oriented towards value creation: Why enter/stay in business? And finally, at the third level, you have to look at the business model from the perspective of your customer: Why should anyone do business with you? (Related link: Developing competitive strategy)

If you are a business leader trying to create value for your stakeholders and for your customers, spend a couple of days thinking about it along with your senior managers. Get your customers to join you and ask them if your value proposition makes sense to them. Do some competitive intelligence to see if your business model is based on sustainable competitive advantages. You will be amazed at how many flaws you will discover in your business model. I say this because I have done this for many companies and as time goes their business models become complex, and therefore, less functional. So change your business model, make it simpler, and then test it with a bunch of sixth-graders. Keep simplifying it till the kids can fully appreciate what you do. Six months later you will be amazed with your financial performance.

Innovation and globalization are linked Business model transformation at EMC Corporation How to destroy your competitors?

Yahoo business model is being good at nothing Yahoo business model in serious trouble Business models for India

Challenges of business model transformation Packaging industry business model

Questions, comments or feedback? Contact us