Tuesday, January 12, 2010

Can You Define Business Model?

I have long suspected that most business people cannot give a simple definition for the common term of "business model." It seems to be a nebulous and vague term that escapes most. Most people think they know what it means, but when you ask them to define it, they usually can't come close to verbalizing it.

So I decided to see if a group of business students, those who are in the great business textbooks every day preparing to succeed in business, know what it means.    In a classroom of a well-respected business school today I asked: "Please define business model." I received the same initial reaction I do from most--some blank stares and a few who started to raise their hands but then realized they didn't really have much to offer. Finally a brave soul took the plunge with something like this: "It's the way a company runs and operates."

That sure seems to be part of it, but aren't we missing something? A few more students offered suggestions that were similarly vague and generally lacking. My definition is simple--a business model is how your business makes money. Period. It is the accumulation of all of the sales, marketing, operations, administration, R&D, finance, and everything else that goes into a business--all the strategies and tactics--that determine if the company makes money or does not make money. Most definitions are like the ones above--mentioning different parts of running a business but failing to describe it as the company's overall plan for making a profit. Understanding this simple and quick definition, here is my two-pronged philosophy for entrepreneurs and their business models:

First, every entrepreneur can pick whatever business model they want.

Second, eventually our efficient market will determine the superior business model for each industry.  Those who innovate the best model for their industry will most likely win.  Those who quickly adopt to this model will likely survive.  And those who stay entrenched in their out-dated and archaic models will die.

In our competitive business environment, the best entrepreneurs are the ones that innovate the best business models in their respective industries.  I don't know how many of them can give a quick and precise definition of the term business model, but one thing is for sure - they get it!