Why Business Models Matter - Article Example

Article Analysis: Why Business Models Matter Student Name: Course Name: Instructor: Institution: Date: This paper provides a critical analysis and review of the article “Why Business Models Matter” by Joan Magretta. Specifically, the current paper will highlight the key points examined by the author and how they apply to the practical business environment and entrepreneurship. According to author Joan Magretta, the terms “strategy” and “business model” are among the most indiscriminately used terms in the business world. Notably, individuals use these terms interchangeably to denote everything in business thus rendering them obsolete. However, no corporate enterprise, be it profitable or non-profitable, can afford to ignore these fundamental concepts. Consequently, in the article, she provides a distinction between the two concepts and continues to explain the importance of a business model, the factors for its success or failure and how the business model is complemented by a strategy, using illustrative examples (Magretta, 2002). Defining Business Model and Strategy Author Magretta, views a business model as a story that describes how an organization produces, distributes and sells its product to gain profits. In other words, the business model clarifies whom an organization’s customers are and how that organization intends to generate revenues by providing its customers with value. On the other hand, a business strategy describes how an organization plans to beat its competitors by being unique. Indeed, competitive advantage can only be attained by providing unique products and services for which consumers are prepared to pay a premium (Serrat, 2012). Hence, to perform at advanced levels than competitors within the same industry or market, enterprises must embrace choices and strategies that augment their business ecosystem. Therefore, the business strategy acts as the differentiating factor, which supplements the business model, and contributes to its success. In essence, the strategy identifies the competitive edge of an organization. Importance of Business Models In the article, Magretta stresses that the significance of a business model as an organizational planning device is its emphasis on how "all the components of the system interface into a functioning whole”. Indeed, entrepreneurial success requires a good and realistic business model. According to Magretta, a good business model should answer the age-old questions by Peter Drucker, such as, whom the customer is, and what the customer values. As such, a good and reliable business model should create the space and provide an opportunity for organizations to test, evaluate and review the expectations about their consumers, methodically think about their business, appropriately organize staff to attain the organization’s mission and change or adapt to market forces accordingly (Magretta, 2002). In retrospect, the key learning point from this article is that the business model is a vital component for the success of any organization, whether it is a startup organization or an already established business entity. Indeed, in the wake of the ongoing internet revolution—notwithstanding the debacles of the dot.com era of 1995–2004—business model innovation is still a significant and vital component pursued by business entities globally. Today, this form of innovation is considered as more transformative and valuable since it decreases risks and, conversely, enables organizations to take more risks. Further, business model innovation has, perforce, inspired organizational innovation; such as, internet-oriented innovative structures and processes that contain open-source and peer-to-peer organizational, collaborative mechanisms. Notably, in the globalized economy, the increasing significance of business models is also a logical reaction to the excessive product choices and concomitant competition arising from technological change and deregulation. Undeniably, for consumers and firms equally in high-income economies, as well as other progressive economies, differentiating between numerous products or services on a merely functional basis is not easy. Furthermore, new competitors with diverse products and/or services, varying patterns of demand, new product manufacturing or distribution technologies, new channels of communication and new prospects for collaboration may wear down the influence of previously established business models. As such organizations need to consistently review and adapt their business models to the rapidly transforming business environment (Johnson, 2010). Additionally, the article emphasizes the business model is critical for any startup organizations since it defines how the entity can actually generate revenue and provides an opportunity for growth through changes in the model. This is contrary to a commonly held belief that startup organizations do not require business models. Successful Business Models The reality of creating and managing successful business models is neither straightforward nor easy. However, doing so is often a necessity in order to allow for enterprises growth and in selected cases, a decisive factor for enterprise survival. Primarily, the starting point for establishing a new business model, or renovating an already established one, has always been the vision regarding how to satisfy the desires of an underserved or unserved consumer segment. As such, a clear and robust value proposition for the targeted consumers is a distinguishing feature of strong and successful business models. Evidently, a customer value proposition that is focused, clear, and consistent is helps forge a more durable theory of the business to enhance the organization’s business structure, products and services, supply chain, consumer service, customer experience, and overall administration. Moreover, good insight into the target consumers’ behavior and the context of their product or service consumption is vital to generate an enduring and effective business model (Scott-Kemmis, 2012). According to Magretta, a good and successful business model should tell a story about the organization. Primarily, the business model should explain how a certain enterprise works and describes the core economic logic of how the organization intends to provide value to its consumers at the right cost. Consequently, like any good story, a robust business model must pass two tests. First, a viable business model must pass the narrative test whereby it should be logically constructed, comprise accurately delineated characters, plausible incentives and a plan that inspires an insight regarding value. Accordingly, the business model story’s plot must seek to accomplish two main business values; that is (1) offering or producing a product or services that satisfies a specific unmet need and (2) selling a particular product or service in an innovative way. Secondly, a successful business model must pass the numbers test whereby, its story must align the organizations expectations regarding its consumers to a sound economic framework. Therefore, a successful and effective business models must pass the two tests and be able to clarify how the various elements of the organization fit together (Magretta, 2002). This involves identifying the limitations of the already existing business model; exploring and evaluating potential new approaches; analyzing and experimenting with the different elements of prospective business models – the what, who, and how – and the way they align with the organization’s objectives and environments; conducting surveys of consumers and shifting and emergent market needs; comprehending the risks and barriers of business model creation; acquiring knowledge from others; acquiring and securing the competencies and relationships vital to implementation of a new business model, and effectively managing change and execution of the selected business model (Scott-Kemmis, 2012). Indeed, the key lesson from the article by Magretta is that the success of any business model lies within close configuration of the what, who, and how dimensions of the organization. The business model must pay close attention to the five correlated elements; including (a) markets, (b) products and services, (c) processes, (d) people, and (e) economics (Serrat, 2012). Markedly, when changes in these elements support and complement each other within an innovative business model, the competences and relationships of the organization reinforce its customer value proposition and subsequently, facilitate profitable performance and continued competitiveness. Moreover, where the business model is entrenched in unique organizational culture, specialized skill and knowledge, close relationships that inspire consumer loyalty or collaborative links with other entities in an organization’s value chain or network, it is likely to offer a more viable foundation for growth and increased performance of the business company (Osterwalder & Pigneur, 2013). Key Lessons learned In summation, the article “Why Business Models Matter” by Joan Magretta has provided an enlightening insight regarding business models and their significance to business and entrepreneurship. Specifically, I have learned that a business model is the fundamental design, the logic, which facilitates an organization to seize, produce, and deliver value to satisfy explicit or latent needs while at the same time deriving profits or revenue for itself. A strategy merely complements the business model, and when used together, the two concepts form the foundation for an organization’s competitive advantage. Further, a business model is a vital tool that allows companies to respond and adapt effectively to changes in their business environment. Another lesson from the article is that the key elements of a successful business model are centered on the answers to: Who are the intended consumers? What is the value proposition presented to the target consumers? How the offering is produced and delivered? And how does the organization capture value from the business? As such, a strong business model includes a value proposition methodically designed to appeal to the prospected market reinforced by the elements of the ‘how’ to guarantee both a unique offering and a profitable business venture. Significantly, the close correlation of the components of a business model augments its effectiveness. Moreover, distinct and closely integrated components are more likely to add to sustainable competitiveness since the model is harder to replicate. Bibliography Johnson, M. W., 2010. Seizing the White Space: Business Model Innovation for Growth and Renewal. 1st ed. Boston, MA: Harvard Business Press. Magretta, J., 2002. Why Business Models Matter. Harvard Business Review, 80(5), pp. 86-92, 133. Osterwalder, A. & Pigneur, Y., 2013. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. 1st ed. Hobokken, NJ: John Wiley & Sons. Scott-Kemmis, D., 2012. Responding To Change And Pursuing Growth: Exploring The Potential OF Business Model Innnovation In Australia, Sydney NSW , Australia: Australian Business Foundation Limited. Serrat, O., 2012. Business Model Innovation, Washington, DC: Asian Development Bank. Read More