Why is a business model important?

@IE University

A business model may seem like a straightforward concept. But the term has shifted and changed over time. Today, if a company is incapable of creating an innovative and flexible business model, that could be its downfall.

Today, technology and innovation are the main players in how successful businesses are run and reinvented. With an explosive amount of information available through big data and the resources provided by digital tech, companies can more easily create and continue to capture value for stakeholders.

Businesses that want to start and stay at the cutting edge use design thinking, strategy, and continuous, fearless change in their business models. Some of the most successful businesses today are those that have reinvented the model, disrupting the industry that was and creating the kind of value customers are looking for in the digital era.

Adults analysis brainstorming

What is a business model?

Does a business model have a simple definition? Yes and no. Business models are the logic behind a company, but the concept can be framed in many different ways. And today, the way the idea has been reframed is inspiring the business owners and CEOs of companies from startups to well-established multinationals.

In his book The New, New Thing, Michael Lewis explains that the business model has been thought of as simply the way a business plans to make money. Expanding upon this idea, Peter Drucker talks about the business concept in terms of flexible assumptions about what a company will and will not do: what they get paid for; markets, customers, and competitors; values and behaviors; technology; and a company’s strengths and weaknesses. Joan Magretta adds that a business model is basically a story about how the company will operate, including the activities involved in making and selling a product or service.

Alex Osterwalder offers a simplified format for thinking about these hypotheses adopted by startups and established businesses alike, called the business model canvas. This business map is a one-page template that includes space for designing, discussing, and reinventing business models. The nine building blocks included are customer segments, value propositions, channels for delivering value, customer relationships, revenue streams, key resources, activities and partners, and cost structure. The idea of having everything mapped out on one page enables forward-thinking leaders to keep things light and flexible in order to invent or innovatively reiterate their business models as situations change and evolve.

Types of business models and tech

Business models have been transformed by technology. Interconnectivity, globalization, and a digital, tech-driven world have all allowed innovative thinkers to rethink traditional models in sectors from travel to retail.

One example of an age-old business model that has been transformed by tech is the platform business model. In the simplest terms, this model brings buyers and sellers together in one space. An in-person marketplace, auction house, or shopping mall are examples of this model that have been around for decades or even centuries. But digital tech has meant these platforms are no longer confined by time and space. Technology has allowed innovative business owners to use this type of model to create enormous digital networks enabling participation and collaboration across the globe. Some of the most successful companies today, including Airbnb, WhatsApp, Facebook, Google, and Alibaba, are examples of reinvented platform business models that use tech to their advantage.

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The global business model is another example of one which has been inspired by technology. These models focus on producing and selling globally in a short period of time, relying on the fast pace of globalization and interconnectivity to thrive. The clothing brands Mango and Desigual are good examples of successful models based on selling to small target segments globally in order to achieve economy of scale, in a way that is only possible in a globalized world.

Interconnectivity and the digital world has also led to the availability of big data, allowing businesses to make sure they are offering the goods and services customers are actually looking for. The “seeking-excellence” business model depends on creating innovative products or services that consumers didn’t even know they wanted. The most disruptive thinkers today can use big data to analyze trends and find new value propositions that reinvent the business model—like Apple did with the iPod and iTunes store in the early 2000s.

Inspiring business models that have broken the status quo

Airbnb

Airbnb is one of the most disruptive businesses of the digital era. Founded by a couple of young startupers in 2008, it is the result of a recognized opportunity (when no hotel rooms were available in San Francisco during a conference held in the city), and the technology capable of connecting hosts and renters from around the globe.

Airbnb Room

As they put it on their About Us page, “Airbnb uniquely leverages technology to economically empower millions of people around the world to unlock and monetize their spaces, passions, and talents to become hospitality entrepreneurs.” It is a sharing-economy-based business, eliminating the overhead of owning the rooms that are rented out, like traditional hotels do. And its platform business model—which uses advances in digital tech to create networks that continuously improve—has allowed the business to boom around the world.

Uber

Uber is at the top of the list as another example of a business that has taken an existing business model and reinvented the wheel. By looking at how a current business model—taxis—could be improved, Uber was able to take a share of a preexisting market using a disruptive, tech-based model for grabbing a ride.

Uber

Now they have expanded and continue to grow through reiterations of their model, including Uber Eats for food delivery; Uber Freight offering shipping services; Uber Health providing rides for patients and healthcare providers; and even technology groups working towards self-driving vehicles and shared air transportation.

In the fast-paced digital world, innovation is a key element of any business model. Executives and CEOs are not responsible for maintaining the status quo defined in one iteration of the business model, but rather for experimenting, learning, and continuously improving to stay ahead of the competition.