A business model is a framework for how a company creates value. Ultimately, it distills the potential of an organization down to its essence and provides a framework for success and overcoming challenges.
A business model captures the fundamental assumptions and any key learnings about a new venture. For example, it might enumerate the company’s core value proposition, targeting customers, key resources, and assumed revenue streams.
A business model is important because it captures where the business is headed and how it will get there. It is the DNA of the company’s strategy and it sets the direction for success.
The exercise of writing a business model also forces deep thought and tough decisions. Just as important is what is left out of the business model — this highlights what is not important.
A business model is often what founders of an emerging company work on first, but it is also useful for established companies moving into a new market. It is useful to assess the potential of a new product line or strategic venture and how it might fare in an existing market.
The process of planning and articulating a business model gives company leaders a clearer picture of how they will realize their vision. At the same time, sharing it with others in the organization encourages alignment, consensus building, and buy-in. A solid business model keeps product and company builders accountable for what they are working on and the time and resources they consume.
Building a business model also encourage leaders to think from the outside in. This means gaining insight into what matters to customers and how to best deliver real value to them.
Every company should write down its fundamental approach to going to market and how it will create real value for customers, employees, and even partners. This is why business models typically include information about target customers, the market, organization strengths and challenges, essential elements of the product, and how it will be sold. Business models are the fastest way to capture and communicate these elements within a company.
Here is a detailed list of components that are found in most business models:
Depending on the maturity of the company and new offering, the actual business model that is created may not be overly complicated or address each component in detail. The goal is to lay out a strong and strategic vision that objectively assesses what is possible and what challenges will be faced in a summary form.
Companies across every industry and at all stages of maturity use business models. Some rely on lengthy processes and build complicated models, and others move quickly and articulate the basics. There is no one right model, but having the discipline to work through a plan is important because it forces internal alignment and the best application of resources.
For established enterprises, a business model is often a living framework that is reviewed and adapted every year based on changes with customers, employees, and the market. For companies launching new products or entering new markets, a business model can help get them off to the right start and make sure that early product and marketing decisions are tied back to the strategy.
For as long as business has existed, companies have been using different tools to set strategy and consider future opportunities. Over the years, the popularity of some frameworks has fluctuated. The following are a handful of the most common frameworks and approaches used today.
This is traditionally a static document describing a company’s problem, opportunity, and solution in the context of a two-to-five-year forecast for costs, income, and revenue. It is often a lengthy superset with significantly more descriptive text than what is in a streamlined business model.
This matrix goes by several names, including the product portfolio matrix, Boston Box, and BCG matrix. It was created in 1970 by Bruce D. Henderson, the founder of the Boston Consulting Group. The growth-share matrix features four quadrants plotted against market growth and relative market share. It was designed to help companies review product portfolios and find growth opportunities. It also highlights what products companies should stop investing in.
The three horizons framework was developed by management consulting firm McKinsey & Company. Horizon one represents core businesses that provide the most profit. Horizon two represents emerging opportunities that have potential for high profit but might also require substantial investment. Horizon three represents ideas for future growth, such as research projects. Companies can use all the three horizons to concurrently manage existing and future opportunities for growth.
This framework is designed to help companies analyze the competitive landscape for their service or product. The five forces concept was first introduced by Harvard professor Michael E. Porter in 1979. Unlike a business model, it is explicitly focused on the profitability of a business as seen through the lens of threats from competitors (new and existing) and the bargaining power of customers and suppliers.
A revenue model describes how a company sells products or generates revenue. Examples of revenue models include subscription, pay-per-use, ad-based, franchise, or razor and blade. A revenue model does not contain other elements traditionally found in a business model, such as competitive landscape or customer pain points.
SWOT is an acronym standing for “strengths,” “weaknesses,” “opportunities,” and “threats.” The four elements are displayed in a two-by-two matrix. The matrix uses both internal factors (strengths and weaknesses) and external factors (opportunities and threats) to identify the worthiness of an identified opportunity or goal. SWOT analysis is not reserved for businesses or organizations — it is possible to perform a SWOT analysis on people, places, and products.
There are many different types of business models. Companies building out a business model may find it helpful to capture and communicate fundamentals in a succinct format that can be easily shared and adjusted.
There are several different templates available to do this. Some companies have embedded business models directly into their software for product and company builders.
Here are some examples of business model templates:
Crafting a business model is part of establishing a meaningful business strategy. It requires deep thought about the core assumptions surrounding how a company and/or product is going to generate value and how the team will work towards achieving its goals. And because of the summary format it requires the distillation of core ideas about the future of the business to its essence.