There is a phenomenon: whether they are traditional or emerging companies, and regardless of their size, managers are excited when the word business model is mentioned. It is hard to see any other management theory that has such appeal. Higgins, a partner at Highland Capital in the US, said something very decisive about business models - "Looking back at our company, we believe that every failure has been down to technology and every success has been down to the business model."
The essence of a business model is the structure of the transaction
There is no discipline that is as unclear about the object of study as business models. There are probably more than 40 definitions of business models and a lack of consensus. We started to focus on this field in 2004, when there were more than 30 definitions of it. At first glance, we thought some of them were quite right, but on second thought, they didn't seem quite right. So we first printed out the 30+ definitions of business models, put them on our desk and read them over when we had time, and kept writing business model cases. When we reached 100 cases, two years had passed and suddenly one day, the concept of a company forming a transaction structure with its internal and external stakeholders popped into my head.
The essence of a business model is that a group of stakeholders invest their resources and capabilities to form a transaction structure. This transaction structure continues to trade, creating new value, which each party distributes according to a certain profitability. If each party's share of the value exceeds the opportunity cost of the resources and capabilities it has invested, the transaction structure will become more and more stable.
The reason why it has become so important is that technological advances have led to changes in transaction costs, which in turn have made it more feasible to reconstruct different transaction structures.
We have constructed a six-factor business model model to analyse this transaction structure in six different dimensions.
Positioning: the way in which the business meets the needs of its customers.
Business system: which actors the company chooses as its internal or external stakeholders.
Profitability model: the sources of revenue and expenditure divided by stakeholders and the corresponding revenue and expenditure methods.
Key resource capabilities: the important resources and capabilities that underpin the transaction structure.
Cash flow structure: The structure of cash flow inflows and outflows to and from the business by stakeholder and the corresponding pattern of cash flows.
Enterprise value: the discounted future net cash flows, which for listed companies is directly expressed as the market value of the stock.
A change in any one of the six elements gives rise to a new business model. A company with a good business model is good, but it is not as good as having the ability to develop a business model, and having the ability to develop a business model is not as good as having the ability to think about the business model. Most of the elite managers we have met do not have a business model mindset, but a strategic and managerial mindset. Business model thinking is: when doing anything, think about what the deal structure will look like and what kind of deal will happen with which stakeholders. This is easier said than done, but it takes time for managers to pay attention and to slowly develop a business model perspective and thinking by unpacking some of the concepts.
Business model innovation Vs. technology innovation: it's not a question of who is more important
One study found that people consider business model innovation to be more important than product technology innovation. But we do not adopt this view. It is not a question of who is more important, but rather two things in themselves, like asking "which is more important, the head or the heart".
We would argue that the same product and technology can be matched with a very different business model, both of which can result in a well run business. Of course, there must be a business model that maximises the value of the product and technology. Whether you are a business owner or a product technology developer, whenever a new product technology is created, you must immediately think about how to design a business model for it to maximise the value of the business.
Conversely, if a business model is designed first, in order to maximise its value, there must be a product technology to support the realisation of this model, that is, a good business model can also lead the direction of product technology research and development.
We used to say that there are generally two sources of product and technology development solutions: user needs and the growth path of the technology itself. When an enterprise developed some new products or combined some existing products and technologies to solve the problem of user needs, it became a new product technology, which is user demand driven. Now, business model-driven is the third source, which leads the development direction of product technology.
Evolution and reconstruction of business models
There are two kinds of changes in business models: evolution and re-engineering. Evolution, i.e. slow change, where one more stakeholder is created today and another is derived tomorrow, and various changes in the way transactions are conducted may occur as a result. A series of dramatic changes over a short period of time, after a period of stability, is a reconfiguration.
Evolution and reconfiguration tend to follow a number of patterns in terms of direction. Generally speaking, there is a tendency to shift from asset-heavy to asset-light. We are not against heavy assets, but companies can find ways to invest very little of their own capital and lift a lot of weight. It buys land and builds houses all over the world and rents them to the world's top 1000 manufacturing companies, but it is an asset-light company that issues a fund in every location, creates some interest bodies and then distributes part of the rent to these investors.
Also, generally speaking, good business model changes move from a high fixed cost structure towards a high variable cost structure. Another point is that stakeholder roles will become increasingly diverse. Whereas in the past a customer was a customer and a designer was a designer, now a customer can be not only a customer but also a word-of-mouth evangelist, a designer, a quality monitor, an employee, or even an investor. Business models are becoming more and more flexible, just like metal liquids.
A business model is not the same as a strategy
A business model is not the same as a strategy. A strategy is first and foremost about choosing an industry, but a business model is not about choosing an industry; there can be many different business models for the same industry, and the same business model can be used for different industries. Using the same model for different industries is a very important source of business model innovation.
People often say whether a model is B2B or B2C, but in fact this is only a difference in strategy, not a difference in business model. Sometimes, it may be the same in terms of business model, so be rigorous and look at their similarities and differences in terms of transaction structure. In this way, it becomes clear that there is one model that is doing well in one industry and the best way for another business to succeed is to be different from that model, especially in the age of the internet and globalisation. In traditional societies, there would end up being two or three companies left in an industry that had different strategies from each other. In the Internet era, on the other hand, there will be many companies left in an industry, each one a monopoly because its business model is unique.
In addition, while strategy emphasises on customer needs, differentiation from competitors and improving operational efficiency, business models create value through transaction structures and are analysed and created through three perspectives, namely the focusing mirror, the multi-prism and the wide-angle mirror.
The 'focus lens' perspective means that there can be very different transaction structures connecting a group of stakeholders, either in a string, or in a hard and soft way (i.e. we manage the inputs and outputs of each stakeholder, and you do the processing), or in a star-shaped network. One finds that the value that can be created, and the value that stakeholders can receive, is different when different transaction structures are adopted. The same business system can have very different profitability models, so we use a 'focus lens' to see how the business system can create more value.
The "multi-prism" perspective means that we usually analyse transactions between stakeholders using a fixed attribute, such as the customer, using its demand attribute. With business model thinking, it is possible to design other attributes and resource capabilities of the stakeholder into the new transaction structure. Another example is the refrigerator, which used to be traded for its functionality, but in fact the refrigerator can also have aesthetic and decorative attributes, can it be cut out and go for separate trading? All this offers new scope for value creation.
A 'wide-angle lens' perspective means drawing a larger circle, bringing in stakeholders from other ecosystems and the activities they may be engaged in, such as new technologies and more efficient business activities, and then reconstructing them through a focusing lens and a multi-prism. For example, in a particular industry, those who do spreads are an ecosystem, those who do splits are another ecosystem, and stakeholders within the ecosystem compete and cooperate at the same time, but between ecosystems are predominantly competitive.
The five realms of business models
Because there are countless new combinations, this also provides a lot of room for business model innovation. We classify business model upgrades and reconfigurations into five realms.
The first realm, the lowest realm is the old product and the old model, the enterprise can only form the differentiation with the competitors through strategy, management and channel construction, which is the least level.
The second level, the product is old, but the model is different, creating value will be different.
The third level, the introduction of a new product in this industry, with a new model to do this new product, this is a higher realm.
Fourth, we don't design a product first, we design a model first, and then design a product to match it.
The fifth level is to design a business model for a stakeholder (not exactly a customer) and sell the product to him, which is the highest level.
Finally, I would like to emphasise that the business model is a very important thing for all companies around the world, and that it is not easy to innovate about it.