The concept of a business model is often confused and misunderstood that leads to multiple failures and disbelief that it can work in many cases. It is seen as a remedy for every business to start generating enormous profits and improve its positions in the market, although it is crucial to know how to choose and apply it in every unique case. Thus, the main aim of this paper is to analyze the article by Joan Magretta “Why bus models matter” that gives a deep insight on the business models and the way of applying them in order to improve business performance.
Developing a business model
The author argues that the main idea of a business model is to create a story that would determine its future activity. A successful business model has to be able to clarify who are the customers and what are the main customers’ values. However, the main considerations that any business model has is to comprehend the ways of making money in the chosen business sphere and find out how to meet customers’ demand both by the product characteristics and its cost.
Implementing a new business model is aimed at substituting the existing practice with new alternatives that make it more convenient and valuable for the customers. A progressive business model can completely replace the old ways of operating and establish new standards in the industry. It is usually based on the old practice, however the idea is to perfect it and suggest new approaches of dealing with typical situations. In some cases, a new model finds a solution to the customers’ needs that have not been met yet or it can recommend innovation to the process itself that would enable the companies to make or sell an existent product in a new way. Business people search for the ways of creating additional value to the customers and their business through applying new business models.
The interest of companies in creating and developing business models is explained by the ability to predict the behavior of the business, environment, and the customers. Business modeling can prepare the managers to the reaction from external factors that determine the success of a company. Precise calculations and predictions must be made in order to assure the efficiency of created business model.
Profit is an important measure of the efficiency of a business model since it demonstrates if the model works. If the outcomes that were projected on the stage of developing a model are not achieved, the managers or business owners should be ready to reassess the model and implement some changes to make it work. Thus, business modeling is a process that consists of suggesting a hypothesis, testing it, and revising it should the need arise.
Testing a business model
Testing a business model is a crucial step that is used to assure its effectiveness. Thus, there are two methods of testing a model: the numbers test and the narrative test. The numbers test is based on checking if the numbers and calculations work while the narrative test focuses at identifying is the story, which was laid in the basis of the business model, makes sense.
Magretta explains that business modeling should not only consider the numbers and logical estimation, it must also include other factors like customers’ behavior, preferences, choice, and brand loyalty (2002). A great benefit of business modeling is the ability to estimate the situation as a whole and make prediction for the future by analyzing every single element of the system.
The author provides an example of successful business planning by the eBay founders. The businesses that saw the potential of selling online have greatly benefited and increased their profits by participating at eBay. It was an innovative idea at the time that succeeded for a couple of reason. A decreased cost of connecting sellers and buyers, high scale of activity, and an appropriate organizational structure were the main factors that contributed to the success of this ground-breaking business model.
The difference between a business model and a strategy
A business model and a strategy are sometimes used as interchangeable terms, although they must not be confused. Both of them should be applied in an organization, but they represent different stages of business planning. Hence, business modeling is connected to analyzing the elements of the system and making sure that everything works efficiently together. However, next stage of business planning requires analyzing and dealing with competitors that is one of the aims of a strategy. Thus, the main difference between a business model and a strategy is described by the issues they deal with and the level of participation.
A strategy applied by an organization focuses at finding the ways for the company to perform better that the competitors. Differentiating a company from its rivals and offering unique products or services is the best strategy to achieving outstanding performance. Using this approach requires generating new ideas based on identifying the customers’ needs that were not obvious before. Moreover, it has to be introduced into the market before any other company does it.
An example of Wal-Mart can explain the distinction between a strategy and a business model. The author explains that its success was not due to implementing a new business model. In fact, the founder of Wal-Mart borrowed the main concept from some discount stores that already worked in the way of offering lower prices by providing less personal service. However, the idea was adapted and slightly changed by the Wal-Mart’s owner by applying a unique business strategy. Thus, the success of Wal-Mart is based on its business strategy not the model that was the same as the one applied by other stores.
The uniqueness of Wal-Mart’s strategy was represented by the ideas of the owner to operate in the different markets and serve a different group of customers. The owner decided to focus on the little rural towns that were ignored by other retailers. Moreover, the size of the towns chosen by Wal-Mart allowed it to become a monopolist spreading its chain all over the country. Thus the application of a distinctive strategy within an existing business model was a key to Wal-Mart’s success.
Furthermore, the strategy of Wal-Mart had other unique aspects such as pricing and merchandising. Wal-Mart reduced costs through implementing innovations in order to keep its promise of delivering national brands at low prices to the customers. Such approach helped the retail chain to stand out of other retailers who were focusing at traditional price promotions and selling quality items.
Conclusion
Thus, a business model is a powerful tool that has an outstanding practical value for the companies. Knowing the mechanisms of creating and applying a business model determines the future success of a venture. Implementing a business model is a dynamic process that requires constant examination of its efficiency and being ready to reassess and adjust it due to the reaction of the market. The necessity to apply a unique business model for a company is explained by the fact that one of the main keys to success is to be different from competitors.
Moreover, the author explains how a business model is different from a strategy and that these terms should not be confused. However, business modeling has to be supported by a successful strategy that would identify the main directions to follow in order to achieve the expected results in order to assure high performance of a company.