Philippe Gattet, Understanding Business Models in 5 Minutes – Understanding

A business model is the description of how a business makes money. To analyze a business model (or in French a business model or economic model) is to describe a company’s offer, its particular organization, the specificity of its assets … which enables it to achieve a certain level of income and profitability. The business model ultimately synthesizes a company’s multiple operational decisions within a strategy that is as coherent as possible to enable it to create value as efficiently as possible.

This concept, coming from the consulting world, was theorized and then formalized by academic research. This explains the very large number of definitions that have existed since the spread of the term in the 1990s. To fully understand what a business model really is, we will here draw inspiration from the approach of Alexander Osterwalder and Yves Pigneur in their book published in 2010 and entitled “business model generation”. In a first approach, a business model can be defined by 4 main components that form a coherent whole:

1. the “customer” component includes first Value proposition. The offer must be defined as a solution to a problem that potential customers encounter: it is therefore the needs that must be met, whether it is goods or services. This solution has a price, a technology, a design and caters to a specific customer segment through communication and marketing channels.

2. Let’s move on to the “supply” component. Delivering a product or service presupposes having within or outside the company of key resources, whether it is economic, technological, human, physical, whether it is a brand or a relational network. In fact, in a way, it is the company’s own value chain, the choice to integrate specific links or, on the contrary, the decision to outsource others, from upstream production to distribution. The decision to internalize, outsource or leave certain key activities to partners is therefore a significant determinant of the business model. Thus, the supply component takes into account the “value capture” mode.

3. “The cost structure” now. We are talking about a structure with variable costs when these increase with the activity level: This is especially true in material production or in traditional service activities. On the contrary, we are talking about a fixed cost structure when the latter increases only marginally with activity. Thus, in the digital world and more specifically on platforms, costs do not increase with the number of customers. Once the breakeven point is reached, any turnover can represent potential profit.

4. Let’s finish with “revenue flow”, as we prefer to call Xerfi “cash flow”, because revenue related to the operating cycle alone seems too restrictive to understand how certain companies actually make money. The most common way is still to sell a product or service in connection with an over-the-counter transaction. But subscription systems, which provide cash advances and build customer loyalty, as well as rentals, which can go as far as getting the customer to pay for usage, are increasingly increasing. Cash flows can also be nurtured by usage rights such as licenses, commissions on transactions, sale of advertising space, rents, capital gains on disposal.

The design and implementation of a business model is therefore the result of a set of coordinated choices that are essential in setting up a business and that determine its viability and future profitability. Finally, the famous business plan only transforms the components of the business model into figures. Moreover, if the imagination and the establishment of a new effective business model are often a crucial success factor for companies, most people are content to emulate existing models that have already proven themselves. More difficult is the case where a company has to modify its business model in depth: it is then the entire company’s design (from its value chain to its sales methods) that needs to be rethought.

As you probably understand, the business model approach gives us an alternative reading to the strict competition model that was originally defined by Michael Porter.

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