In 2020, all competitive companies are in a state of constant business transformation. That’s just a fact : those that do not evolve are made redundant by stronger, more agile competitors. And so, mediocre companies update their products and services. Good companies update their processes, too. Great companies, meanwhile, update their business models.
Over the past decade, entrepreneurs and CEOs alike have been told over and over that Business Model Innovation (BMI) is key to their companies’ growth. They tend to nod knowingly, rarely asking themselves what their business model is. They just know they have to change it. This lack of clear definition often leads to the creation of conflicting objectives / actions, as various stakeholders will have different ideas of what the business model of their company is, and what innovation should look like. They mean well, they’re just missing the larger picture.
Below are 7 ways to define a business model. Each definition creates different strategies for companies, as I shall prove using the supermarket business model as an example. The definitions are lifted both from the fantastic work of Professors Gassmann, Frankenberger and Sauer (Exploring the Field of Business Model Innovation, 2016), and from my own experience as a strategy consultant.
1. Activities definition
“A business model is a set of interdependant activities spanning firm boundaries”
What does that mean?
The company defines itself as a list of actions taken along the value chain, and how those activities are interlinked. This obviously attracts the attention to who perfoms these activities, hence lending a strong HR and governance vibe to an activity-based strategy. This definition also helps differentiate between core activities and annex activities, so that a company can concentrate on the value it adds best (sub-contracting is often used by companies that abide by this philosophy). Activities-based business models are dependent on 4 key concepts, which make each company unique:
Novelty — Activities leading to innovation are key to a company’s financial success
Lock-In — activities are interlocked in such a way that it would be difficult to uncouple them
Complementarities — Not only are activities locked together to create more value, but they complement each other
Efficiency — Activities are made to be as efficient as possible to avoid waste along the value chain
Note that nowhere in this definition are resources mentioned. Neither are the customers, the product or the general (dynamic) economical environment. The list could go on : like every definition, the activity-based view of the business model is an imperfect portrayal.
Supermarket Business model : activities-based
2. Process definition
A business model is a dynamic process of balancing revenue, costs, organization, and value.
What does that mean?
This vision of the business model is a lot more dynamic, and will vary from month to month as a company tries to find the perfect equilibrium between resources and competencies, organisational structure, and value proposition (spoiler alert, such a perfect equilibrium doesn’t exist). Changes to the model occur when one of the aspects is changed, or when their relationship is altered. This should keep decision-makers on their feet, as a model can change without any internal actions or decisions being made : a startup might release a new product, making an incumbent's value proposition obsolete. That obsolescence ripples through as resources become scarce, competencies become redundant, and the organisational structure crumbles. Fall of the Roman empire, here I come.
The process definition entails that any business model is a snapshot at a moment in time, and nothing more. This means that companies embracing that philosophy know that they have to change regularly to keep up with internal and external changes. This allows them to plan ahead of time, creating valuable, disruptive projects. Identifying and eliminating inefficiencies and improving the exploitation of resources thus becomes the name of the game.
Supermarket Business model : process-based
3. Narrative definition
A business model is the narrative of how firms do business
What does that mean?
What are businesses if not the sum of the stories we tell ourselves about their offered value? The past two definitions concentrated on the business side of business models. This definition aims to rectify this imbalance by concentrating on the term model. Indeed, a narrative entails a history, and a history entails a tangible framework that can be used for simplification’s sake (Who are our customers, why do we do business, what do we offer, how do we make our products/services…). This simplified, abstract concept can then be studied, improved, copied, imitated, emulated… just like any model.
The narrative definition is important for two reasons :
It specifies that much like a good recipe, variables of a business model can be more or less changed, but that key components will remain the same (add sugar for extra taste).
It also shows that innovation comes from a break with history, which needs to be understood for a company to remain competitive. This concept thus has a lot of value for upstarts and underdogs.
Supermarket Business model : narrative-based
4. Sales definition
A business model is a way to commercialise a product or service
What does that mean?
The sales definition of BMI relies on 6 key components, which describe the way a company’s products or services are commercialised. As such, this approach is a lot more specific than that of the Activities, Process or Narrative definitions, yet still allows for an infinity of variable combinations. The 6 components of the sales definition are as follows :
Value proposition : what is the value that the customer will extract from the product or service?
Market segment : which customer should we target, and why?
Value chain : what assets do we need to create and distributes our offerings?
Cost/profit structure : given the defined value chain and value proposition, how will the offer be priced, and what profit can be expected from it?
Value network : What is our position within Porter’s Five Forces model?
Competitive strategy : How do we keep an advantage over our competitors?
This definition takes time into account (a sale happens at a moment in time, after all), as well as the imbalance between various aspects of a model (giving managers the tools to quickly adapt to improve their commercialisation efforts). Finally, this definition highlights the key difference between a strategy and a business model : while the latter is dependent on delivering value to customers, the former is a way of delivering financial value to shareholders. This means that the rules of engagement are much more restricted when working on BMI, as the company is operating within the rules established by the Sales definition.
Supermarket Business model : Sales-based
5. Choice definition
A Business model is a result of strategic/tactical choices/decisions
What does that mean?
I mention above that well-defined rules are what separates a business model from a strategy (among other things). Indeed, the rules of the Strategy game are ill-defined, and each decision has hundreds, if not thousands of outcomes (not least because the reaction of competitors is impossible to take into account). It is less so for business model innovation, which only offers a finite amount of possible choices (targeting rich or poor customers, selling online or not…). In this definition, each choices shuts down a plethora of other potential opportunities, which is something that had not been mentioned in previous definitions.
The Choices definition also highlight the need to quickly react to changes to the business’ environment. Those that do not do so choose not to act, and may very well be left behind by the economy, by their industry, by competitors or by customers.
I already posited that business models can be copied and imitated. This leads to an interesting game theory dilemma when it comes to choices : if a company enters a market, should it copy the main players, or enter using an innovative approach that may in turn be copied by incumbents? If it tries to hide its innovation, how long can it do this for? A question for the ages, which from experience, is seldom asked.
Supermarket Business model : choices-based
6. Archetype definition
A business model is an archetype of patterns for answering the who-what-how-why questions of a business.
What does that mean?
If you’ve read anything I’ve ever written on Business model innovation, you’ll know that this is by far my favorite definition.
Business Model Innovation’s ambitious goals require an intuitive framework. Firstly, it is paramount to precisely understand which customer segment a new business model seeks to address. Secondly, we must identify the company’s target value proposition, be it a product or a service, and how it caters to this specific customer need. Thirdly, the value chain created to deliver a strong value proposition to customers must be mapped out. Finally, managers must identify an effective profit mechanism to ensure the new business will be viable commercially. Put simply, we are here answering the who, what, how, and why of the soon-to-be-launched business. In order be truly innovative, a company should seek to differentiate itself using two or more of these levers (anything else would only strengthen the status quo, something that previous definitions forget).
Based on this framework, which actively encourages innovation, a finite amount of models / archetypes / categorisation / morphologies can be identified and reproduced. This was mentioned in previous definitions (Sales, Choices), but did not go far enough, as this finite amount was not quantified. The authors behind The Business Model Navigator (Gassmann, O., Frankenberger, K., & Csik, M., 2014) identified 55 business model archetypes, accounting for 90% of businesses. Through my own research, I have identified a few more (83 to be exact, perhaps accounting for the missing 10%), ranging from the A La Carte model to the Variable-based Pricing model.
Supermarket Business model : Archetype-based
7. Imbalance definition
A business model coexists with competing business models withing an organization, and requires ambidextrous thinking.
What does that mean?
Building on everything we’ve just discussed (and there’s a lot to unpack), this definition posits that businesses are able to both exploit and explore business models, simultaneously. This means that businesses are always on the lookout for the next disruption, innovation, transformation… words that sing to the hears of management consultants everywhere. The explorative approach means that businesses have to change their philosophy as it is very different from exploiting an existing model. It demands a strong mental gymnastic, and this ambidextrity is not an easy talent to acquire — not least because employees rebel against constant changes.
That imbalance is all the more interesting because new is not always better when it comes to BMI : what works well for a small company may not work for a large one and vice-versa. As described above, we’ve gone way beyond mere product improvement or technology creation : whereas a new product is often said to be better than its previous iteration, a new business model is not necessarily better than that of a competitor. It’s just different.
It also means that a decision needs to be made with regards to how a new model comes about. Should it be separated, integrated, or a mix of the two as it matures? Those are questions which keep CEOs up at night, as things like cannibalisation and synergies must be taken into account when introducing a new model.
Supermarket Business model : Imbalance-based
Conclusion
This can be confusing, I know. But what isn’t understood cannot be improved. Below are a few conclusion from all the above:
How key activities are undertaken make each and every company unique.
Activities and resources, both internal and external, have to be constantly balanced to keep up with a dynamic environment, leading to innovation.
This dynamism can be used as a story-telling device which can be copied by others.
A business model is made up of key components which creates many possible models (but not an infinity)
Exploiting one model makes it impossible to exploit another
A business model is only innovative if a few key elements are changed simultaneously
Innovating one’s business model means both exploiting the existing one while exploring another
Good luck out there.
