What is the Business model and what is it for?

A business model is a conceptual tool used to describe how a company creates, distributes and captures value. In other words, it can be defined as the set of organizational practices and strategic solutions through which the company acquires its competitive advantage on the market.

The business model is a relatively young concept . Although the term appeared for the first time in 1957 in the article " On the construction of a multi-person, multi-stage business game ", it is only towards the end of the 1990s that it gained real importance a growing interest from the scientific community and beyond. Using the words of the Swiss scholar Alexander Osterwalder , a business model can be defined as the conceptual tool that describes how a company creates, delivers and captures value .

Although this is the most famous definition, to date there is no universally accepted and shared one. What most authors agree on is that, in general, a business model should be composed of the following elements :

1. the company's value proposition ;
2. the market segments to which it is addressed;
3. the structure of its value chain ;
4. the value acquisition mechanisms that the company implements;
5. the ways in which these elements are connected in an individual company's specific architecture .

In a nutshell, therefore, the business model of a company should illustrate its value proposition by clearly identifying the target it wants to address, the main suppliers from which it obtains the materials necessary for the production cycle, the characteristics of the of production he wants to make and so on. All this in a flexible and extremely dynamic perspective. In fact, it would be unthinkable to believe that a business model, however successful, can be eternal: in order for it to continue to create value, it must change and adapt to the changing external and internal environment.

How to represent a business model: The business model canvas

Over time, various tools have been created to help entrepreneurs and startuppers represent their value proposition . Among the various visualization tools and methods, the most famous is certainly the business model canvas by Osterwalder and Pigneur. A business model is a conceptual tool used to describe the way in which a company creates, distributes and captures value. In other words, it can be defined as the set of organizational practices and strategic solutions through which the same acquires its competitive advantage on the market.

It is a simplified graphical representation of the main activities underlying a company's business model which allows the logic through which it manages to create, distribute and capture value to emerge.

Particularly useful in the context of startups, the canvas consists of nine blocks , each of which represents one of the constituent elements of the business model. Thanks to it, it is possible to obtain an overall representation of the company reality understood as a large ecosystem of interdependent activities. In the upper part of the model, intuitive and easy to read, non-financial information such as key resources, partners, distribution channels and consumer segments is represented; the lower part, on the other hand, frames financial information such as the structure of costs and revenues.

At the heart of the model is the value proposition , understood as the value proposition that a company makes to the market, expressed in terms of tangible or intangible advantages that consumers can obtain from the purchase of a specific product or service.

How are business models classified?

Classification is one of the main challenges managers and experts face when it comes to business models. Scholars Foss and Saebi, for example, bring business models back to three dynamics : evolution, adaptation and innovation.

Specifically, when we talk about evolution we mean the replication, implementation and maintenance of an existing business model.

On the other hand, adaptation is the process through which an existing business model is precisely adapted to the opportunities and threats of the external environment (changes in customer preferences, contractual power of suppliers, technological changes, new competitive dynamics and so on). However, adapting an existing business model is often not an easy task. The propensity of companies to adapt their business models, in fact, depends on innumerable factors: for example on whether an event in the external environment is perceived as a threat or as an opportunity and on the type of strategic orientation that the company pursues.

Instead, we speak of business model innovation in all those cases in which a company creates a new business model within a pre-existing sector. This means redefining existing products and services and how they are delivered to consumers from existing but non-replicable resources. In a dynamic and constantly changing environment, business model innovation must be a priority for all those companies that want to stay on the market. The bankruptcy of Blockbuster and the entry of Netflix into the DVD movie distribution and rental market set the pace. Netflix innovated the business model on which Blockbuster itself had based its success, leading to the bankruptcy of the video rental giant in 2010.

Along the same lines, Massa and Tucci (2014) highlight the difference between the creation of a new business model (business model design), as in the case of innovative or highly technological startups, and the transformation of an existing business model (business model reconfiguration), as happened to Netflix itself which switched from mail order rental to a subscription for online content streaming, becoming one of the ott services.

Examples of business models

Although in theory it is difficult to bring a business model to predefined categorizations, in practice it is possible to identify recurring patterns based on some common characteristics, in particular the underlying revenue model .

Thus, it may be useful to resort to some of the more famous examples .

• Transactional : it is the most common business model as it consists of the classic sale of goods and services in a physical or virtual shop. The revenues derive from the direct sale and therefore from the transaction between the buyer and the seller.
• Marketplace : it is based on the intermediation between two parties, generally a customer and a supplier. The revenues in this case derive from the presence of a fee on each transaction made. Among the most famous marketplace models it is possible to mention that of Amazon, but also those of eBay, Booking or Airbnb.
• Freemium : particularly used in the case of software and apps, the model is based on offering a free basic service that becomes paid when you want to take advantage of additional options and features.
• Software as a service (SaaS) : is a distribution model, which takes advantage of cloud technology, in which a service provider provides third-party software and applications that users can rent without having to purchase a license. Among the most famous examples it is possible to mention iCloud and Microsoft Office 365, but also all the apps in the Google world.
• Pay as you go : This is a payment model often used for SaaS services, which allows customers to pay for a service based on how they use it.
• franchising : it is a collaboration formula between two parties, franchisor and franchisee, in which the former grants the use of its brand and business model to the latter upon payment of a fee.
• Leasing : it is based on the rental of an asset or property, usually for business use, against the payment of a periodic fee.

To these are added many others such as the commercial affiliation , the donation , the community model , the bricks and clicks model or, again, the model based on advertisements .

Business models and entrepreneurial opportunities: a complex relationship?

Often the concept of business model is linked to that of entrepreneurial opportunities . This is because the business model represents the preferred tool through which new opportunities are transformed into value propositions for the company and for all its stakeholders.

However, seizing the right opportunity at the right time doesn't automatically mean success. In order to ensure positive long-term performance for the company, a good business model must first of all be consistent with the company's strategy and objectives, but above all it must be able to adapt to changes in the external environment. From this point of view, the knowledge and skills of the individual subjects involved are fundamental. Entrepreneurs and managers must be prone to learning, continuous training, flexibility and change to foster the development of dynamic capabilities able to seize new opportunities starting from existing business models.

This explains why many successful business models have failed: think, for example, of the bankruptcy of the Canadian company Blackberry . In fact, the same idea or technology adopted on the market through two different business models could produce completely different economic performances, partly attributable to exogenous factors and partly to the lack of resources and capabilities within the organisation.

As scholars Chesbrough and Rosenbloom point out in a 2002 article, the solution is in experimentation : a new business model is successfully tested only after considerable trial and error.