Business Model

What is a business model?

A business model is the mechanisms that are used by companies to represent various aspects of its business, including its purpose, offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies.

This is the most important strategy to generate profit (make money), Over the years, business models have become much more sophisticated.

Evolution of business model:
In the 1950s, new business models came from McDonald's Restaurants and Toyota.
In the 1960s, the innovators were Wal-Mart and Hypermarkets.
The 1970s saw new business models from FedEx and Toys R Us;
The 1980s from Blockbuster, Home Depot, Intel, and Dell Computer;
The 1990s from Southwest Airlines, Netflix, eBay, Amazon.com, and Starbucks.

Amazon.Com:

• Strong sales, no profits
• Customer-driven to its core
• Each customer’s experience is unique
• Provides great selection, good value, discovery and convenience
• A true online community

Poorly thought out business models were a problem with many dot-com. Today, the type of business models might depend on how technology is used. For example, entrepreneurs on the internet have also created entirely new models that depend entirely on existing or emergent technology. Using technology, businesses can reach a large number of customers with minimal costs.

The importance of business model:

In developing a business model especially for a new product/service/business, the most important element is the dimension of time, more specifically the timing of investments/expenses or cash flow out versus the receipt of revenues/accounts receivables or cash flow in.

The principle issues are:

• Essentially how much of the product or service has to be built before customers can make some level of either actual purchase decision and/or purchase commitment?
• How much investment/expense is required to secure these revenues/commitments from customers? and
• How much risk is there in achieving net positive cash flow, given the required upfront investment and the future time to capture revenues/receivables cash inflow, within an acceptable timeframe, if ever?

These business model issues often make or break new ventures.

Business models that are optimized to reduce the upfront investment, that accelerate the revenue/receivables cash inflow, that obtain cogent and reliable customer feedback often and earlier, and that take other measures to reduce the investment risk all have a higher probability of business success.

The process of business model design is part of business strategy.

The implementation of a company's business model into organizational structures (e.g. workflows, human resources) and systems (e.g. information technology architecture, production lines) is part of a company's business operations. It is important to understand that business modeling commonly refers to business process design at the operational level, whereas business models and business model design refer to defining the business logic of a company at the strategic level.

For example, in the entertainment industry, does one have to produce a movie for RM 1 million plus before any box office revenues can be derived, or can the business model be evolved by licensing certain established characters/signing leading movie stars for secondary licensing rights for fast-food chain promotional-tie-ins, movie merchandise licenses, etc. can generate pre-release cash inflow through licensing fees.