The Explainer: What is a Business Model?

The Explainer: What is a Business Model?

Today, business
model and strategy are among the most sloppily
used terms in business, but these are separate concepts
with enormous practical value. And when it comes to concepts
so fundamental to success, no organization can
afford fuzzy thinking. The term business model
emerged when personal computers and spreadsheets
became common says Joan Magretta, a longtime editor
at Harvard Business Review. Managers could use these
tools to literally run the numbers to see models of how
various decisions might affect the bottom line. A new business model might
hinge on either a different way to make something or a
different way to sell something. Take discount retailers like
Kmart and Walmart, for example. These pioneers applied
supermarket logic to the conventional
department store and developed a
discount retail model which involves slashing costs
by eliminating chandeliers, carpets, and personal service
in exchange for lower prices. While business model
is a description of how your business runs,
a competitive strategy explains how you will do
better than your rivals. So for example, part of
Walmart’s unique strategy was to prioritize
rural customers. In founder Sam
Walton’s own words, he put good sized stores
into little one-horse towns which everybody else was
ignoring, and it worked. Focusing on rural areas let
Walmart buy up land for cheap, target customers no one
else was going after, and preempt other discount
stores from entering the market in those areas. Their customer strategy
thus reinforced other parts of their competitive strategy. In contrast, Kmart tried
to appeal to everyone, and that’s not a
distinctive strategy. So while they may have
a good business model, without a clear strategy they’ve
struggled to stay competitive. So to get ahead of your
rivals, you not only need a good business model
and a clear strategy. You also need a clear
understanding of the difference between the two.

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About the Author: Oren Garnes


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