why business models matter.docx
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why business models matter.docx
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whybusinessmodelsmatter
Agoodbusinessmodelbeginswithaninsightintohumanmotivationsandendsinarichstreamofprofits.
WhyBusinessModelsMatter
byJoanMagretta
"BUSINESSMODEL"wasoneofthegreatbuzzwords(时髦口号)oftheInternetboom,routinelyinvoked,asthewriterMichaelLewisputit,"toglorifyallmannerofhalfbakedplans"Acompanydidn'tneedastrategy,oraspecialcompetence,orevenanycustomers.allitneededwasaWebbasedbusinessmodelthatpromisedwildprofitsinsomedistant,illdefinedfuture.Manypeopleinvestors,entrepreneurs,andexecutivesalikeboughtthefantasyandgotburned.Andastheinevitablecounterreactionplayedout,theconceptofthebusinessmodelfelloutoffashionnearlyasquicklyasthe.comappendageitself.
That'sashame.Forwhileit'struethatalotofcapitalwasraisedtofundflawedbusinessmodels,thefaultliesnotwiththeconceptofthebusinessmodelbutwithitsdistortionandmisuse.Agoodbusinessmodelremainsessentialtoeverysuccessfulorganization,whetherit'sanewventureoranestablishedplayer.Butbeforemanagerscanapplytheconcept,theyneedasimpleworkingdefinitionthatclearsupthefuzzinessassociatedwiththeterm.
TellingaGoodStory
Theword"model"conjuresupimagesofwhiteboardscoveredwitharcanemathematicalformulas.Businessmodels,though,areanythingbutarcane.Theyare,atheart,stories-storiesthatexplainhowenterpriseswork.AgoodbusinessmodelanswersPeterDrucker'sage-oldquestions:
Whoisthecustomer?
Andwhatdoesthecustomervalue?
Italsoanswersthefundamentalquestionseverymanagermustask:
Howdowemakemoneyinthisbusiness?
Whatistheunderlyingeconomiclogicthatexplainshowwecandelivervaluetocustomersatanappropriatecost?
Considerthestorybehindoneofthemostsuccessfulbusinessmodelsofalltime:
thatofthetraveler'scheck.DuringaEuropeanvacationin1892,J.C.Fargo,thepresidentofAmericanExpress,hadahardtimetranslatinghislettersofcreditintocash."ThemomentIgotoffthebeatenpath"hesaidonhisreturn,"theywerenomoreusethansomuchwetwrappingpaper.IfthepresidentofAmericanExpresshasthatsortoftrouble,justthinkwhatordinarytravelersface.Somethinghasgottobedoneaboutit"1WhatAmericanExpressdidwastocreatethetraveler'scheckandfromthatinnovationevolvedarobustbusinessmodelwithalltheelementsofagoodstory:
preciselydelineatedcharacters,plausiblemotivations,andaplotthatturnsonaninsightaboutvalue.
Thestorywasstraightforwardforcustomers.Inexchangeforasmallfee,travelerscouldbuybothpeaceofmind(thecheckswereinsuredagainstlossandtheft)andconvenience(theywereverywidelyaccepted).Merchantsalsoplayedakeyroleinthetale.TheyacceptedthechecksbecausetheytrustedtheAmericanExpressname,whichwaslikeauniversalletterofcredit,andbecause,byacceptingthem,theyattractedmorecustomers.Themoreothermerchantsacceptedthechecks,thestrongeranyindividualmerchant'smotivationbecamenottobeleftout.
AsforAmericanExpress,ithaddiscoveredarisklessbusiness,becausecustomersalwayspaidcashforthechecks.Thereinliesthetwisttotheplot,theunderlyingeconomiclogicthatturnedwhatwouldhavebeenanunremarkableoperationintoamoneymachine.Thetwistwasfloat.Inmostbusinesses,costsprecederevenues:
Beforeanyonecanbuyyourproduct,you'vegottobuilditandpayforit.Thetraveler'scheckturnedthenormalcycleofdebtandriskonitshead.Becausepeoplepaidforthechecksbefore(oftenlongbefore)theyusedthem,AmericanExpresswasgettingsomethingbankshadlongenjoyedtheequivalentofaninterestfreeloanfromitscustomers.Moreover,someofthecheckswerenevercashed,givingthecompanyanextrawindfall.
Asthisstoryshows,asuccessfulbusinessmodelrepresentsabetterwaythantheexistingalternatives.Itmayoffermorevaluetoadiscretegroupofcustomers.Oritmaycompletelyreplacetheoldwayofdoingthingsandbecomethestandardforthenextgenerationofentrepreneurstobeat.Nobodytodaywouldheadoffonvacationarmedwithasuitcasefulloflettersofcredit.Fargo'sbusinessmodelchangedtherulesofthegame,inthiscase,theeconomicsoftravel.Byeliminatingthefearofbeingrobbedandthehoursspenttryingtogetcashinastrangecity,thechecksremovedasignificantbarriertotravel,helpingmanymorepeopletotakemanymoretrips.Likeallreallypowerfulbusinessmodels,thisonedidn'tjustshiftexistingrevenuesamongcompanies;itcreatednew,incrementaldemand.Traveler'schecksremainedthepreferredmethodfortakingmoneyabroadfordecades,untilanewtechnologytheautomatedtellermachinegrantedtravelersevengreaterconvenience.
Creatingabusinessmodelis,then,alotlikewritinganewstory.Atsomelevel,allnewstoriesarevariationsonoldones,reworkingsoftheuniversalthemesunderlyingallhumanexperience.Similarly,allnewbusinessmodelsarevariationsonthegenericvaluechainunderlyingallbusinesses.Broadlyspeaking,thischainhastwoparts.Partoneincludesalltheactivitiesassociatedwithmakingsomething:
designingit,purchasingrawmaterials,manufacturing,andsoon.Parttwoincludesalltheactivitiesassociatedwithsellingsomething:
findingandreachingcustomers,transactingasale,distributingtheproductordeliveringtheservice.Anewbusinessmodel'splotmayturnondesigninganewproductforanunmetneed,asitdidwiththetraveler'scheck.Oritmayturnonaprocessinnovation,abetterwayofmakingorsellingordistributinganalreadyprovenproductorservice.
ThinkaboutthesimplebusinessthatdirectmarketingpioneerMichaelBronnercreatedin1980whenhewasajunioratBostonUniversity.Likehisclassmates,Bronnerhadoccasionallyboughtbooksofdiscountcouponsforlocalstoresandrestaurants.Studentspaidasmallfeeforthecouponbooks.ButBronnerhadabetteridea.Yes,thebookscreatedvalueforstudents,buttheyhadthepotentialtocreatemuchmorevalueformerchants,whostoodtogainbyincreasingtheirsalesofpizzaandhaircuts.Bronnerrealizedthatthekeytounlockingthatpotentialwaswiderdistributionputtingacouponbookineverystudent'sbackpack.
Thatposedtwoproblems.First,asBronnerwellknew,studentswereoftenstrappedforcash.Givingthebooksawayforfreewouldsolvethatproblem.Second,Bronnerneededtogetthebookstostudentsatacostthatwouldn'teatuphisprofits.SohemadeacleverproposaltothedeanofBostonUniversity'shousingdepartment:
Bronnerwouldassemblethecouponbooksanddelivertheminbulktothehousingdepartment,andthedepartmentcoulddistributethemfreetoeverydormoncampus.Thiswouldmakethedepartmentlookgoodintheeyesofthestudents,anotoriouslytoughcrowdtoplease.Thedeanagreed.
NowBronnercouldmakeanevenmoreinterestingproposaltoneighborhoodbusinessowners.Iftheyagreedtopayasmallfeetoappearinthenewbook,theircouponswouldbeseenbyall14,000residentsofBU'sdorms.Bronner'sideatookoff.Beforelong,hehadextendedtheconcepttoothercampuses,thentodowntownofficebuildings.EasternExclusives,hisfirstcompany,wasborn.Hisinnovationwasn'tthecouponbookbuthisbusinessmodel;itworkedbecausehehadinsightintothemotivationsofthreesetsofcharacters:
students,merchants,andschooladministrators.
TyingNarrativetoNumbers
Theterm"businessmodel"firstcameintowidespreadusewiththeadventofthepersonalcomputerandthespreadsheet.Beforethespreadsheet,businessplanningusuallymeantproducingasingle,basecaseforecast.Atbest,youdidalittlesensitivityanalysisaroundtheprojection.Thespreadsheetusheredinamuchmoreanalyticapproachtoplanningbecauseeverymajorlineitemcouldbepulledapart,itscomponentsandsubcomponentsanalyzedandtested.Youcouldaskwhatifquestionsaboutthecriticalassumptionsonwhichyourbusinessdepended.forexample,whatifcustomersaremoreprice-sensitivethanwethought?
andwithafewkeystrokes,youcouldseehowanychangewouldplayoutoneveryaspectofthewhole.Inotherwords,youcouldmodelthebehaviorofabusiness.
Thiswassomethingnew.Beforethepersonalcomputerchangedthenatureofbusinessplanning,mostsuccessfulbusinessmodels,likeFargo's,werecreatedmorebyaccidentthanbydesignandforethought.Thebusinessmodelbecameclearonlyafterthefact.ByenablingcompaniestotietheirmarketplaceinsightsmuchmoretightlytotheresultingeconomicstolinktheirassumptionsabouthowpeoplewouldbehavetothenumbersofaproformaP&Lspreadsheetsmadeitpossibletomodelbusinessesbeforetheywerelaunched.
Ofcourse,aspreadsheetisonlyasgoodastheassumptionsthatgointoit.Onceanenterprisestartsoperating,theunderlyingassumptionsofitsmodelaboutbothmotivationsandeconomicsaresubjectedtocontinuoustestinginthemarketplace.Andsuccessoftenhingesonmanagement'sabilitytotweak,orevenoverhaul,themodelonthefly.WhenEuroDisneyopeneditsParisthemeparkin1992,itborrowedthebusinessmodelthathadworkedsowellinDisney'sU.S.parks.Europeans,thecompanythought,wouldspendroughlythesameamountoftimeandmoneypervisitasAmericansdidonfood,rides,andsouvenirs.
EachofDisney'sassumptionsabouttherevenuesideofthebusinessturnedouttobewrong.Europeansdidnot,forexample,grazealldaylongatthepark'svariousrestaurantsthewayAmericansdid.Instead,theyallexpectedtobeseatedatpreciselythesamelunchordinnerhour,whichoverloadedthefacilitiesandcreatedlonglinesoffrustratedpatrons.Becauseofthosemiscalculations,EuroDisneywassomething
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