An Article Review
Summary and Conclusion
“Why Business Models Matter” is a very good management article on why business models exist and what significant roles do they play in successful business management and performance. According to the author, Joan Magretta, every practical, business organization is founded on a business model, whether or not its founders or managers are cognizant that what they do fit into the components of a business model.
According to the author, the term business model has been cannibalized at the height of the dot.com businesses during the Internet boom, where business models were defined to differentiate the Internet companies from the brick and mortar types of businesses (Magretta, 2002, p. 3). Actually, the term business model first came into widespread use with the advent of the personal computer and the spreadsheet, including the time when business planning was a traditional practice for business organizations (2002, p. 5).
All business models are developed from the fundamental value chain which make up all businesses (2002, p. 4). This chain is composed of two important segments. The first part consists of all the business activities linked with creating a business. This includes product design, procurement of raw resources, manufacturing, among others. The second part consists of all the activities linked with the sales aspect of the business. This includes targeting and serving customers or marketing, realizing a sale, product distribution, service delivery, etc. All these aspects compose a business model – the way the organizations design and procure products, market and sell it, etc.
Hence, a business model may actually comprise of the ordinary value chain of a company. It may also be a unique way in each or even just one aspect of the value chain. For instance, a fresh business model may be in terms of design, where a company designed a new market offering for a need which has not yet been addressed by the market. This may also be an alteration of the manufacturing process, where a company has turned into an innovative process to produce their products. It may also be an improved way of producing and selling an already proven product or service (i.e. through the Internet or traditional retail outlets or direct selling).
According to Magretta (2002), a business model must pass two critical tests for it to be considered a successful model. These are the number test and a narrative test. The latter means that if the business model tells a good or appealing story (for its stakeholders), then, this model must be successful. One example is the narrative of how Dell directly reached out to its customers and did not require third party agents in its value chain. Hence, after finishing its computer products, they were instantly delivered to its customers. Investors bought this narrative and thus, the Dell business model became effective.
A business model’s narrative is also gauged according to how it is used as a powerful tool to improve business execution (2002, p. 6). Walmart’s story of how it intends to serve customers with the best products at the best prices can be used to get the members of the company to be aligned with the kind of value which it aims to create or achieve. As employees see the larger picture, they conceive the ways and means by which they can fit in and they modify their behaviors.
The number test of a business model pertains to the way the unique business methods have generated profits for the company. The financial success of a compnay indicates, among other things, the success of its business model. When one thinks about one company getting a lot of customers and raking more income than its competitors, there is a good chance that its business model is working.
In short, a successful business models represent a better way of doing business than the existing alternatives. It may provide more value to a discrete group of clients or it may completely replace the traditional way of doing things and become the standard for the next generation of businessmen to beat. The best business model, according to Magretta, is the one which alters the way business is done. This model creates a new and aggregate demand and revamp the way business is usually set.
On an interesting note, most successful business models were said to have been created by accident than by a design or a forethought. This is exemplified by the way the traveler’s cheque was conceived by J. Fargo, the owner of American Express. Basically, it solved a problem, answered an unmet needs and it made life easier for the travellers/consumers.
Inherently, the strength of the business model as a planning tool is that it focuses the attention of the business organization as to how the business elements will tie together to make up a working whole. This does not imply, however, that a business model cannot be altered. On the contrary, as the managers are focused on the business elements, they are more attuned as to how and which part will be altered in order to fit into the whole picture. In reality, the success of a business model depends on its management. While the business model initially set some motivations and economic assumptions, the managers are the ones who change the components and make the business model work. They continuously adopt in order to make their business models work. This happens when managers are focused and they consciously operate from a model of how the entire business system will work. Thus, each of their decisions, intiatives and standards make important contributions and likewise provide valuable feedbacks. This is now reflected in the number test, where profits reflect not just the financial return but more of the effectiveness of the business model.
Magretta, Joan, 2002. Why Business Models Matter. Harvard Business Review. Harvard: Harvard Business School Publishing, Inc.