A business model simply defines the foundation of how an organization makes money; however, the process of business model construction is an essential part of business strategy. Business models answer these fundamental four questions:
Who is the customer?
What does the customer value?
How do we make money in this business?
What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?
A good business model begins with an insight into human motivations and ends in a rich stream of profits that is essential to every successful organization, whether it’s a new venture or a mature company. Often as companies mature, they face declining growth as innovation is abandoned due to increased resistance to change. To achieve consistent levels of growth, organizations must focus on the existing businesses while still considering areas they can grow in the future.
At ThriveVance, we provide a structure for companies to assess potential opportunities for growth without neglecting performance in the present.
Developing a compelling business model is an art. It’s like telling a good story; Stories that explain how the organization will work. American Express offers the story behind one of the most successful business models of all time, that of the Traveler’s check. In 1892, J. Fargo, then president of American Express, experienced much difficulty translating his letter of credit into cash. This experience prompted him to design the well-known Traveler’s checks for the general public, as he knew if he, as the president of American Express, had such difficulty turning his letters of credit into cash, the ordinary travelers were undoubtedly experiencing same if not more difficult.
From the innovation of the Traveler’s evolved a robust business model with all the elements of a good story: precisely delineated characters, plausible motivations, and a plot that cultivated insight about value. The travelers' checks offered by American Express was very appealing to customers. for a small fee, travelers could buy both peace of mind, since the checks were insured against loss and theft, and convenience as the traveler's checks were very widely accepted. Merchants also accepted the checks because they trusted the American Express name, which was like a gold stamp of credit, and they welcomed the idea as it attracted more customers. As more merchants accepted the checks, competing merchants were inclined to also accept them not to be left out. As for American Express, since customers always paid in cash, it had discovered a risk-free business. Hence, it provided American Express the primary economic objective that turned what would have been an ordinary operation, into a money-making machine, barring in mind that American Express was able to float the cost.
Ordinarily, costs precede revenues, meaning you must build and pay for your product before you can sell it. However, since people paid for the checks before they used them, American Express was getting something comparable to an interest-free loan from its customers. Furthermore, some of the checks were never cashed, giving the company an extra bonus. As this story shows, a successful business model signifies a better way than the current options. It may offer more value to a distinct group of customers, or it may completely change the way it was done and become the standard for the next generation of entrepreneurs to beat. American Express' business model changed the rules of travel. American Express' business model changed the rules of travel. Travelers feared being robbed or faced the frustration of having to get cash in strange cities and the American Express checks removed a significant barrier to travel, helping many more people to take many more trips. Compelling business models like this don't just shift existing revenues within the organization, they created new, incremental revenue source. Traveler's checks remained the favored method for taking money abroad for years, until new technology, ATM allowed travelers even greater convenience.
Creating a business model is a lot like writing a new story. At some level, all new stories are variations of old ones, adaptations of the universal themes underlying all human experience. Similarly, all new business models are variations of the generic value chain underlying all businesses. Broadly speaking, this chain has two parts; Part one includes all the activities associated with making something: design, purchasing materials, manufacturing, and alike. Part two includes all the activities related to selling something: finding and attracting customers, distributing the product or delivering a service. A new business model's plot may focus on designing a new product for consumer's unmet need, or it may be a process innovation; a better way of making or selling or distributing an already proven product or service.
Typically, business model and strategy are among the most sloppily used terms in business; they are often stretched to mean everything, and end up meaning nothing. However, these concepts offer enormous practical value. With expert assistance, clients can draw sharp boundaries around abstract terms which involve some arbitrary choices that allow these ideas to be less confusing and difficult to use. When defined, we can bring clarity and the organization to remove unclear thinking of fundamental concepts in performance.
When managers operate consciously from a model of how the entire business system will work, every decision, initiative, and measurement provides valuable feedback. Profits are essential not only for their own sake but also because they tell whether a model is working. If you fail to achieve the results you expected, you reexamine your model. Business modeling is, in this sense, the managerial equivalent of the scientific method—we start with a hypothesis, which we then test in action and revise when necessary.