A business model pictures how an enterprise gains revenue from customers, at a cost of business activities that is less than the revenue, thus generating a profit.
The model shows the key elements, functions, and relationships among them. This also displays how expenses and revenues flow.
To put it as simply as possible, such a model describes how a business makes money!
Informal modeling of how businesses work has been around in commerce since early times. However, the term did not come into common use until the last few years of the twentieth century.
The late 1990s saw a historic speculative bubble in internet companies. The setting up of many new firms was followed the spectacular collapse of most of them a short time later. Many of the failures resulted from poor enterprise model design as well as bad management.
Many of them did not even have the clarity of thought of a 'Back Of the Napkin Business Model'.
It is an appealing legend that great businesses arrive with a flash of insight over a dinner, or coffee, and come to life on a napkin. Sometimes the venue is a bar and the medium of recording is the back of a drink coaster!
One of these stories tells of Herbert Dwight Kelleher the co-founder, and former CEO of Southwest Airlines, sketching the concept that became Southwest Airlines on a cocktail napkin in a San Antonio restaurant. This figure shows you what this famed napkin may have looked like.
Real life is not so simple. Before and after such doodles comes a huge amount of homework. This work fleshes out the key elements and flows of funds through the model.
The napkin version of the model usually raises the question, “Can I make money with this terrific idea?” That is a good question to germinate a business concept. However, it is not yet a model of the business. Moreover, it is a long way from being a strategic plan for growing a firm.
Without a clear understanding of how an enterprise will work to bring in continuing revenues, the chance of building a successful business is low.
By the way, I do not dismiss the use of napkins to solve problems, or even explore business strategy. I have found the approach of Dan Roam invaluable in many contexts.
Remember what the modeling challenge is. "How do you plan to make money?"
A series of other issues lie behind that question -
You see how quickly this becomes much more complicated than napkin doodling?
It helps to have a framework to organize all these questions. A set of sample models can also help you make sense of all the data. Such a framework can help in reviewing the performance of the enterprise in an ongoing way, or in a more thoroughgoing way for the SWOT analysis done when a full-scale strategic planning exercise is in process.
The Business Model Canvas (BMC) is a popular tool used to think through proposed business changes. The canvas is a way to map key business elements. This map enables discussion of business performance shortfalls. Managers can then ‘canvas’ possible innovations to improve the performance.
This puts questions like those listed above, into a diagram that can help management teams organize their thoughts.
The parts of the canvas with definitions are as follows -
Alex Osterwalder pioneered the template in his PhD thesis, The Business Model Ontology; A Proposition In A Design Science Approach.
This is now more accessible in the delightful book, which is listed below: Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers.
The website provides useful resources, including a helpful and brief video introduction to using the modeling canvas.
There is even an ‘app’ for the BMC; called the Toolbox for iPad. This toolbox combines the speed of a napkin sketch with the power of a spreadsheet. It enables you to map, test, and iterate your business ideas.
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Resources on the use of enterprise models in strategy analysis and development include the following items -
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