Joan Magretta in her article Why Business Models Matter took the

• The business model

• The strategy

What is a Business Model?

While the word model often stirs up images of mathematical formulas, a business model is in fact a story of how a business works. In general terms, a business model is the method of doing business by which a company can generate revenue. Both start-up ventures and established companies take new products and services to the market through a venture shaped by a specific business model. In their paper, The Role of the Business Model in Capturing Value from Innovation, Henry Chesbrough and Richard S. Rosenbloom outlined the six basic elements of a business model:

1. Articulate the value proposition – the value created to users by using the product

2. Identify the market segment – to whom and for what purpose is the product useful; specify how revenue is generated by the firm.

3. Define the value chain – the sequence of activities and information required to allow a company to design, produce, market, deliver and support its product or service.

4. Estimate the cost structure and profit potential – using the value chain and value proposition identified.

5. Describe the position of the firm with the value network – link suppliers, customers, complementors and competitors.

6. Formulate the competitive strategy – how will you gain and hold your competitive advantage over competitors or potential new entrants.

Joan Magretta in her article Why Business Models Matter took the

• The business model

• The strategy

What is a Business Model?

While the word model often stirs up images of mathematical formulas, a business model is in fact a story of how a business works. In general terms, a business model is the method of doing business by which a company can generate revenue. Both start-up ventures and established companies take new products and services to the market through a venture shaped by a specific business model. In their paper, The Role of the Business Model in Capturing Value from Innovation, Henry Chesbrough and Richard S. Rosenbloom outlined the six basic elements of a business model:

1. Articulate the value proposition – the value created to users by using the product

2. Identify the market segment – to whom and for what purpose is the product useful; specify how revenue is generated by the firm.

3. Define the value chain – the sequence of activities and information required to allow a company to design, produce, market, deliver and support its product or service.

4. Estimate the cost structure and profit potential – using the value chain and value proposition identified.

5. Describe the position of the firm with the value network – link suppliers, customers, complementors and competitors.

6. Formulate the competitive strategy – how will you gain and hold your competitive advantage over competitors or potential new entrants.

Joan Magretta in her article Why Business Models Matter took the

1. Articulate the value proposition – the value created to users by using the product

2. Identify the market segment – to whom and for what purpose is the product useful; specify how revenue is generated by the firm.

3. Define the value chain – the sequence of activities and information required to allow a company to design, produce, market, deliver and support its product or service.

4. Estimate the cost structure and profit potential – using the value chain and value proposition identified.

5. Describe the position of the firm with the value network – link suppliers, customers, complementors and competitors.

6. Formulate the competitive strategy – how will you gain and hold your competitive advantage over competitors or potential new entrants.

Joan Magretta in her article Why Business Models Matter took the

Joan Magretta in her article Why Business Models Matter took the

Joan Magretta in her article Why Business Models Matter took the concept of the business model a little further. Magretta suggests every business model needs to pass two critical tests, the narrative test and the numbers test. The narrative test must tell a good story and explain how the business works, who is the customer, what do they value and how a company can deliver value to the customer. The numbers test means your profit and loss assumptions must add up. At the most basic level, if your model doesn’t work, then your model has failed one of the two tests.

To begin the modeling process you need to articulate a value proposition on the product or service being provided. The model must then describe the target market. The customer will then value the product on its ability to reduce costs, solve a problem or create new solutions. A market focus is needed to identify what product attributes need to be targeted and how to resolve product trade-offs such as quality versus cost. You also need to identify how much to charge and how the customer will pay.

Think of business modeling as the managerial equivalent of the scientific method - you start with a hypothesis, which you then test in action and revise when necessary. The business model also plays a part of a planning tool by focusing managements on how all the elements and activities of the business work together as a whole. At the end of the day, the business model should be condensed onto one page consisting of: a diagram outlining how the business generates revenue, how cash flows through the business and how the product flows through the business and; a nar