Designing innovative business models has become a high priority. According to a 2009 follow-up study, seven out of ten organizations are engaged in building business model innovation, and about 98% are actively renovating their business models.
The economic slowdown is urging the companies to enhance their business models or develop new ones. Also, the rising new technology is giving a unique shape to the industries and redistributing profits. The value out of the business models is creating a global transformation. Before we go further, let’s understand what a business model is.
What Is A Business Model?
All businesses should know how to thrive in the business models. Joan Magretta says that a business model is a story that explains how an enterprise works. Peter Drucker describes it as the answer to the questions: Who is your customer, what does the customer value, and how do you deliver value at a reasonable cost?
However, not all organizations fully know how to compete and outstand with the business models. A study across the past years has proved that organizations have lacked focus on developing creative models and have gauged the effectiveness in isolation.
In contrast, the business models’ success depends on how interactive are the business models with the existing ones in the market. Research also suggests that when organizations compete using distinct business models, the results are difficult to predict.
When evaluated in isolation, a specific business model appears to be superior. However, the performance is relatively less given interaction. Something even th rivals can turn into partners.
The main reasons for the business model to fail to include the following:
- Most business models fail as the assessment is not proper while done in isolation. At the same time, the decisions also turn ineffective.
- Businesses fail to use the models to their full potential due to the slightest attention to dynamic elements.
So, developing business models require the right choice. Over time, businesses observe that they end up at a competitive advantage.
Business Model Components
The significant component of the business model is the executives’ choice about how an enterprise must operate. Examples include facilities location, marketing ideas, the scope of vertical integration, procurement contracts, etc.
In the simplest terms, a business model comprises managerial choices and their effects. Here are the prominent three options while designing a business model.
1. Policy choice talks about the required actions about the organization’s operations, such as starting a new plant in rural areas.
2. Asset choices relate to an organization’s physical resources, such as Inventory, Furniture, Machinery, Equipment, etc.
3. Governance choices talk about how organizations make decisions concerning asset choices and policy choices. For instance, you can own new machinery or lease it.
The results of such choices can either be rigid or flexible. A flexible result responds quickly when the selection changes—for instance, a sudden increase in price causes a decrease in volumes.
A customer develops trust in a product. Even though a competitor offers the product at minimized prices, the customer’s tendency to buy those products is unaffected. Such consequences can be termed rigid.
Knowing such distinctions is essential as they influence competitiveness. Flexible consequences are easy to deal with, while severe consequences take time to build.
Business Model Characteristics
Every business model is unique. Some good characteristics of a business model include alignment with business goals, self-strengthening, and robustness. Significantly, the business models cause a virtuous self-strengthening cycle, which requires attention. However, this is often neglected.
Consequences exist from the business model choices, which can be to build resources or assets, including production experience, asset usage, project management, trust, etc., which can create a tremendous difference.
Building virtuousness in cycles is easy when no competitors exist. How about situations when the competitors have similar business models. The best way is to deal with severe consequences so that you create more value than your competitors do.
What if the business models differ? The consequences are unpredictable, and analyzing which business models work fine is difficult. Strengthening the virtuous cycle, destroying the rival process, and turning the competitors into complements are the three practical ideas for your growth.
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