How to Choose a Business Model

Creating a successful business often requires careful attention to strategy as well as excellent execution. Of all the strategic questions an executive must answer, the choice of business model may be the most crucial. It guides the formation of product strategy, informs the choice of investments the company makes, and ultimately shapes the company itself. There are several standard business models that apply across a wide spectrum of industries. For your own company you may choose among the models, combine them to make a hybrid model, or alter them sufficiently to pioneer a unique and groundbreaking model.

Instructions

1. Study the standard business models. Some of these are focused on internal operations, such as the low-cost leader or growth by acquisition. Others are expressed as a means of doing business, such as auctions, bricks and clicks, or direct sales. Yet others describe your product strategy and pricing model, such as subscriptions, razor and blades or freemium.

2. Break down the business model into its key elements: value proposition to specific customers, profit formula that explains how the company will make money, and the operational activities that support both. Analyze all three elements in each potential business model that you examine.

3. Examine your current business and operations. If your company has been in business for a while but is having difficulty turning a profit, you may have a poorly defined or inappropriate business model. For example, you may be focused on being the low-cost leader in your industry, and on competing for customers on price. If a larger competitor has entered the marketplace and is able to capture the low-cost leadership position, you may need to change your strategy and adapt. There can only be one low-cost leader. Perhaps you could to shift into related industries and employ a growth by acquisition model.

4. Analyze your industry and your competitors' business models in order to find gaps in the marketplace. For instance, if you sell a type of software that is sold in boxed copies by your competitors, consider building your business model around subscription services. This defines your company as an SaaS ("Software as a Service) provider, and implies that your IT infrastructure and networking will be one of the most critical components of your business operations. It should therefore receive a lion's share of investment.

5. Fine-tune your business model to reduce upfront investment and fixed costs, and speed up your cash flow and customer feedback loop. If you manufacture goods that are expensive to produce or low margin, investigate ways to put off production until you have orders in hand and to ensure that those products are extremely relevant to the customer. For instance, Mini Cooper offers extensive customization on their cars via a build-your-own car website. This allows them to tailor products specifically for their customers and to put off building the car until a customer has placed an order.

References

• QuickMBA.com: Business Model
• Harvard Business Review: Reinventing Your Business Model
• Malone, Thomas W., Weill, Peter, Lai, Richard K., D'Urso, Victoria T., Herman, George, Apel , Thomas G. and Woerner, Stephanie, Do Some Business Models Perform Better than Others? (May 2006). MIT Sloan Research Paper No. 4615-06.