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Most business leaders believe business models are critical for success and recent studies have shown that 7 out of 10 companies develop and continuously modify their business models. Business model innovation is undoubtedly here to stay, but the success or failure of one business model depends on how it interacts with those of the other players in the industry.
What is a business model?
The terms ‘business model’, ‘strategy’, and ‘tactics’ are often used interchangeably, but they inhabit very different realms. If a business model were a car, the strategy would be the design and building, and the tactics would be how you drive it. Different car designs function differently and provide different value for drivers in different situations. Strictly speaking, a business model consists of a set of managerial choices and the consequences of those choices on your company.
Companies make three types of choices when creating business models: policy choices, asset choices, and governance choices. One business model may appear superior to others when analyzed in isolation, but it might create less value than the others when exterior interactions are considered.
In the real world, rivals may often end up becoming partners in value creation. Evaluating models in an isolated simulation can lead to erroneous assessments of their strengths and weaknesses, as well as unwise decision-making. This is one reason so many new business models fail.
Types of business model
Companies take vastly different approaches when it comes to designing a business model.
The Irish airline Ryanair is one example. In the early 1990s, the company moved from a traditional business model to a low-cost one and removed all the frills, cut costs, and slashed prices. They chose to offer low fares, fly out of only secondary airports and charge for all additional services, among other changes. The airline chose to use a non-unionized workforce and offer high-powered incentives to employees. The result is a business model that allows Ryanair to offer a decent level of service at a low cost.
This business model creates several virtuous cycles that maximize the airline’s profits through increasingly low costs and prices. All the cycles result in reduced costs, which allow for lower prices that in turn grow sales and ultimately lead to increased profits.
A different example would be the case of Irizar, a Spanish manufacturer of vehicle bodies for luxury buses and coaches. Company leadership changed twice in 1990 and morale had hit an all-time low before they made changes. Their choices included eliminating hierarchy, decentralizing decision-making, focusing on teamwork, and having workers own the assets. This led to three major consequences: employees developed a tremendous sense of ownership, feelings of accomplishment, and trust in their company. The Irizar business model generates a great deal of customer value, and its key virtuous cycle connects customer willingness to pay with relatively low costs, generating high profits that feed innovation, service, and high quality.
Many of the larger tech companies such as Apple and Microsoft have accumulated product assets (iPhones, PCs, etc.) that give them a competitive advantage. Making smart choices about pricing, royalties, and product ranges has led them to make a difference in their sector. The assets of a company can be anything from project management skills to reputation: resources that help them stand out.
In order to compete through your business model, you need to know how to strengthen the virtuous cycles of your company, undermine those of your rivals, or use them to turn the strengths of your competitors into their weaknesses.
How to create a business model
Your business model should be designed for your enterprise. It should be aligned with your company goals and there must be consistency in the choices made by different executives within the business. It should also be sturdy enough to maintain its effectiveness over time.
Establish a value proposition by determining exactly what you offer that is better than anyone else. Identify the core of your business, determine key business activities, and then record the essential resources you need in order to provide this offering. Identify your target market by narrowing your audience down to specific personas. Conduct detailed research and pinpoint the possible challenges and solutions that are likely to occur. Your business model will be based on certain assumptions at the beginning. It is important to remember its dynamic nature and that room for innovation and flexibility to change are necessary.
Most importantly, your business cannot function properly without the proper relationships with key partners that contribute to its efficiency. It is important to focus on the selection of suppliers, partners and strategic collaborations from the very beginning. Relationship building is essential: connections can be made quickly and easily through the Finnovating Marketplace platform.
The Finnovating Marketplace is an excellent way of connecting with companies in a wide range of areas such as digital marketing, cloud providers, HR, legal services and investment partners.
Finnovating´s platform lets you browse and search the world’s largest FinTech database according to activity, company size or business model. Not only is it the perfect place to find new potential partners and innovators, the chat function also lets you start a conversation instantly with any business or organization that interests you. Networking could not be easier!