Description of a Business Model
A business model is an established framework for the way different components of a businesses' operation work together to support viability and profitability. A business model describes how strategy and market need operate to provide clear value to targeted consumers. It also outlines the economic, financial and marketing requirements of a company. A business that cannot describe its own model cannot describe, with certainty, how it will be consistently profitable.
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Value Proposition
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One of the most important components of a business model is the value proposition, which describes the value of goods and services the business offers to consumers. The value proposition is not what the business sells, but rather the reason a consumer would buy it. For example, a business may sell drill bits, but the reason people buy them is because they need holes. The value proposition starts by understanding what people need, then endeavors to create and market a solution to fulfill the need.
Value Chain
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Having a clear description of an organization's value chain is a critical component of the business model. The value chain describes how the logistics of business operations creates an offering that costs less to produce than what it can be sold for. If the business model has an effective value chain, then it will generate a high profit margin.
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Marketing and Sales
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A business model must describe its target market segment and have a strategy for closing deals. An essential part of starting and running a successful business is knowing who to market to and how to reach them. The business model confirms that the target segment exists, and creates a plan for reaching key people and turning them into customers.
Value Network
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A business model must describe the overall position of the organization with respect to the industry and production chain. It will identify competitors and recognize complimentary businesses and services. It creates a plan for working with partners that produce components necessary to the final product. The business model considers industry and partnership networks that can be used to deliver value to customers.
Competition
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A business model must be built around an understanding of existing competition. It must define how to gain competitive advantage by means such as lower costs. Also, the business model clarifies how to differentiate offers from competing companies and analyzes niche markets to take advantage of new opportunities.
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