Explain the Concept of a Business Model

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Bright ideas should lead to intelligent business models.
Bright ideas should lead to intelligent business models. (Image: bright ideas image by feisty from <a href='http://www.fotolia.com'>Fotolia.com</a>)

At its most general, a business model is a general plan for converting new technology or an innovative idea into actual economic value, such as liquid money or market share. It differs from a business strategy in its level of generality. While strategy is aimed at specific distributions of wealth (e.g. to shareholders), business models are abstract visions of the mechanism that will create wealth and profit.

Features

A gap analysis is the first entity in a business model. A new technology or idea exists, therefore, a market must be found for it. There is a specific problem that will be solved by this specific innovation. From this, customers must be targeted. A specific segment of the market must have a specific problem solved by the existence of the innovation. For example, an inventor is working on a new outboard engine for boats that operates with less gas than the normal engine. The problem is high gas prices, and the market is boaters and fishermen.

Function

The purpose of a business model is to translate innovation into profit. Therefore, the “value chain” must be laid out at some level. The value chain is made up of five elements: inputs such as raw materials; operations, including the actual shop floor activities; outbound value, including delivery to customers; marketing, or getting the word out about the innovation; and service, or maintaining the value of the product over time, after it is in the hands of the customer. The value chain is a subset of the business model and specifically deals with the day-to-day functioning of the firm.

Benefits

The business model is meant to rationalize the nature of the innovation, that is, to place the innovation into practical, production terms. It is particularly useful when applying for financing, since the plan exists in abstract form, easily visualized by those who are interested. In other words, the idea is not enough. A practical plan is necessary to attract investors.

Considerations

Several other important features are necessary to round out the concept of a business model. The most important are the product and the identification of the market. But beyond this, complementors must be identified. These are firms and products that can help your own innovation actually work. If you are working on a new, more efficient type of outboard engine, then working with firms that provide outboard oil or propellers might serve to give the new firm a leg up on the competition. From the identification of complementors, the business model should also have something that shows how the firm will supersede its competition. This is often called competitive advantage.

Effects

The basic effect is to put an idea into the heads of all who see the plan, or model. The idea is one thing, seeing it come to life is another. Therefore, the model must explicitly show the product filling a need, making profit and being part of the "value chain" that can make rational sense out of the plan. The writing of a business model should also show the viability of the product and the market niche it is meant to fill.

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