A business model can be a range of things. It can be really simple – “I sell fruit from a cart by the side of the road” – or really simplified– “We extract oil and turn it into petrol” (Shell). At the other extreme it can be a number of interlinked spreadsheets or process diagrams that explain how the business works in huge detail.
A business model is a way of quickly capturing what a business does, at the right level of detail, for the decision that you need to make.
The fruit seller can have several different types of business model. He could have an orchard where he grows his fruit. Alternatively, he could buy the fruit from the farmer. In the one case he has lots of assets. In the other he has none. Which is better? It depends on how much capital he has, or how easily he can access capital and his appetite for risk.
The oil company has a research and exploration part that finds the oil, a production arm that turns the oil into petrol. It also has a distribution arm that sells the petrol in petrol stations. It’s profits are made based on how cheaply it can find, extract and process the oil. If oil gets harder to find, or other companies process oil more cheaply it’s profits start to suffer. So it may chose to change its business model by leaving the exploration part of the business.
That’s a couple of simple examples.
Everything that a company can be described in terms of who it’s customers are, how it provides value to them, how it creates that value and how the money flows.
Business Models Get Disrupted
Most companies that have been around for a while have stable business models. With stability comes complacency. With complacency comes a new group of companies in the sector looking to make money. They try and disrupt the stability
Here a few examples:
- Fracking in the US has disrupted the oil industry
- Clean power disrupts electricity supply and distribution
- Online retail disrupts malls
- Ride sharing disrupts taxis
- Budget airlines disrupt full service national carriers
- Mobile phones disrupt fixed line incumbents
- Instant messaging disrupts mobile phone companies
The list goes on….
Disruption is all about changing the way that an industry or sector operates. It’s a step change. It is not something that you can get out of by being better, faster or cheaper than the competition. You all face the same problem. How you react determines whether you will survive and prosper
Changing Your Business Model
When you are in a situation where your industry is being disrupted then you face choices. You can either retreat into profitable niches that are small and defensible. You can ignore the changes and suffer years of declining revenue and irrelevance. Or you can change.
None of them are pretty and all involve big risks.
A great first step if you are in this situation is to step back and start thinking about who your customers are and the problems that they have. This is both strange and obvious. Shell thinks it sells petrol. Actually, it provides the power that allows customers to drive their cars. The problem that customers have is that they need a power source for cars. For 100 years that has been petrol. What should Shell do now people are going electric AND autonomous?
How should it change? Shell is now starting experiment with it’s business model and believes that it can sell electricity to car owners – staying in the same place between them and their problem. The product changes. The value that they provide doesn’t.
This is how business models help businesses. They show you the current situation and how you make money. Then as you start stressing the current business model – looking at environmental and competitive threats, for example – you can then see opportunities for change
How does your business model stack up?