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Developing a business model

business-model Developing a business model - an orgtology perspective

One of the aims of a model is to create a simplistic understanding of something. An architect will create a model to visualise an end-result. A mathematician could create a model to ease calculations for others. For organisations, we create a business model to show how we do our business.

Stewart and Zhao (2000) see a business model as a statement of how a firm will make money and sustain its profit stream over time. Osterwalder et al. (2005) defines a business model as the blueprint of how a company does business. There are thus numerous ideas of what a business model is.

In general, a business model should give clarity on how an enterprise will successfully operate. This will include knowing the sources of revenue, the intended customer base, products, and financing details. A business model should describe the rationale of how Org creates, delivers, and holds value. It must also define the economic, social, cultural, and contexts within which the entity operates. Having a simple model for operations is a key part of any business strategy.

In precis, to create a business model means finding a simple way to explain the core aspects of a business.


Basic Assumption on developing a business model.

If a business model simplifies the core business of an entity, then to craft it, one must thoroughly grasp the complexities of the business because in Org, complexity always precedes simplicity.

Through this assumption, we acknowledge that to create something simple one must understand its complexities. We must know the "what, why, where, when, who, and how" of the business. We must know both, its purpose and intent. In so, a simple business model will need complex research.


Simplicity

The best example of a simplistic business model is the renowned "bait & hook" model. It was introduced in the early 20th century and is still extremely valid today. We see this when we by a low-priced razor, that we must maintain with expensive blades. Or getting a mobile phone that hooks you through a two-year contract, or the cheap printer that needs regular cartridge refills. In this model the "bait" mostly comes at low cost, whilst the "hook" holds binding and recurring cost.

As we modernise, environmental demands become more complex. This makes it hard to reduce business models to a simplistic "bait & hook" model. A more recent and complex model would be Netflix, where the consumer pays a fixed monthly amount to watch whatever he/she wants on the Netflix database. This model became so successful that it now threatens the livelihood of the old Hollywood feature film industry. Complex models like McDonalds and Toyota rose in the 50's. In the 1960s, we saw Wal-Mart and the opening of Hypermarkets. The 70's brought us models such as FedEx and Toys R Us. In the 80's we saw Blockbusters, Intel, and Microsoft. The 90's gave us eBay, Amazon.com, and Starbucks. These are all unique business models. They are designed to get repetitive income from the same customer. In a sense they all have a "bait & hook" base.

With the rise of artificial intelligence (AI), business models will become more complex and difficult to grasp. The Facebook model is an excellent example of this. Its users are its commodities. A user can use their platform for free. In return FB sells the users to its advertisers. With all your data, which they collect through FB, WhatsApp, Instagram, and others, they can accurately link advertisers to the right consumers. The advertisers will bid on a group of users, and the highest bidder will get the most accurate target audience. This model is simple for AI but complex for most humans. Through the information highway, strategic sourcing can now manage complex supply chains and collaborative, relational contracting structures.

In the initial stages of business model concepts, it was key that everyone in the company understands it. We are now learning that there is a correlation between understanding and implementation. I.e., the parts of Org that implements must understand. Of course, with that I am not negating the importance of vision, motivation, etc. The downside of this idea is that as AI rapidly takes over the operational activity of Org, it becomes unnecessary for all employees to have a clear grasp of the business model. In fact, the future might prove that AI and those who run the company must understand the business model.



Linear vs. dynamic business models

Choudary (2013) distinguishes between two broad families of business models. He contrasts pipes (linear business models) with platforms (networked business models). Linear models create value and then flows it, like water through a pipe, to the consumer. Dynamic models create platforms where users can create and consume value. The movement of activity is notably more random in dynamic models.

A platform is a dynamic business model, which negotiates a value exchange between two or more interdependent entities. E.g., Facebook does not only sell advertising space. They create perfect matches between producers and consumers. The platform adds value to the user, who in return, adds value back to the platform. Also, advertisers add value to the users in that they show them offerings which the user is already interested in. That is why FB makes strategic purchases such as Instagram and WhatsApp. They want to know who you are so that they can accurately match you with the producers of products of which you are already interested in.

Dynamic models enable intelligent interaction. It makes use of AI, which can learn and process at higher speed and at lower error, than any group of humans can. This is the 21st century's predominant business model.

There are three elements to a successful dynamic business model. These are:

  • A toolbox that creates connection between entities. It must be easy for others to plug in and interact. It is a "bait & hook" model. The "bait" attracts users to a platform. In turn, the platform creates a user dependency.
  • An AI driven matchmaking system that nurtures the flow of value through connections between producers and consumers.
  • Data generation. This is how it is different to other business models. Data enables matchmaking, which adds value to the toolbox, which adds value to data. Data thus creates an intelligent and dynamic cycle.


How to monetize platform business models

A platform is a dynamic business model, as described above.

According to Jose van Dijck (2013), there are three main ways in which media platforms can monetize:

  • 1.The subscription model. Here platforms charge users a monthly fee in exchange for services.
  • 2.Advertising. AI is taking targeted advertising to a whole new level. The degree of customization and personalization is revolutionary. Advertising through commercial messengers is phasing out. It's all about matchmaking - the linking of data. E.g., personal recommendations from friends or influencers on social media is an advanced form of advertising.
  • 3.Monetization of data and metadata. Platforms generate massive amounts of data. Numerous businesses on the planet are interested in that data. Data is the new oil. Problem is that most governments around the world are clamping down on platforms that do not respect user privacy. Rules in this regard are likely to tighten. In so, this form of monetization still needs a lot of innovation.

Developing a business model

There is no right or wrong way to design a business model. The only rules are - that it must make sense and it must work. The table below shows a basic business model design. I mostly encourage my clients to go beyond this basic design. Be creative. Make it unique. That is where the magic happens. It could take the form of a symbol, model, narrative, etc. Uniqueness creates value.

In the model, we relate the following key data to know our business.

  • Business partners.
  • Key activities.
  • Key resources.
  • The value proposition.
  • Customer relationships.
  • Distribution channels.
  • Customer segments.
  • Cost structure.
  • Revenue streams.

From an orgtology perspective we must respectively relate resources, activities, and relationships to the core business. This creates a framework for performance. Also, we must understand our cost structure and revenue streams. This creates the boundaries for relevance.

To be more specific. Partners, key activities, and resources define the projects and processes that holds all the work of Org. In so, they create the operational part of Org. In orgtology that is the process construct. A unique and competitive value proposition links the operations of Org with its customers. We understand our customers through their segments, our relationship strength with them, and the distribution channels that work for them. In orgtology we call this the relationship construct. Lastly, we understand our cost structure in relation to our revenue streams. This becomes our strategic environment. It drives change so that Org will stay relevant. In orgtology we call this the project construct.


Developing a business model


Conclusion

Creating a unique business model is no easy task. Most organisations never achieve that. Creativity is rare; therefore, industries mostly have similar models. Each one uniquely painted, but inside, it is the same engine. Now and again revolutionaries arrive, and if they survive, we get McDonalds, Apple, Amazon, Uber, Netflix, Facebook, and a few others. When this happens, the rules change, and competitors are rendered irrelevant. They are the creators of, what Kim and Mauborgne call a Blue Ocean Strategy. Unfortunately, what these authors never tell you, is that those who can do this, are few and far apart. In orgtology, we call it the X-Factor.

Begin with the boxed model given above, then go wild with it. Create a narrative, draw a symbol, give it flow, make it a model. Everything is now available everywhere. The world is flat once more. Everyone copies everyone else. If you want to control your industry, then you must have a unique and efficient business model. In future the power to monetize will lie with those who can create a brand around a unique business model. If not possible to be unique, then efficiency is your only hope. I.e., if you can't be better, then at least be faster.


References

  1. Choudary, Sangeet Paul. 2003. Why Business Models fail: Pipes vs. Platforms. Wired Magazine.
  2. Dijck, José van. 2013. The culture of connectivity: a critical history of social media. Oxford: Oxford University Press. ISBN 978-0-19-997079-7. OCLC 839305263.
  3. Hendrikz, D (2020). 'Hypothesis 2x – the Foundation of Orgtology', *The International Orgtology Institute, * 04 April. Available at: https://orgtology.org/.../69-hypothesis-2x-of-orgtology - accessed on 10 May 2020.
  4. Hendrikz, D (2021). 'The strategic process – an orgtology perspective', *The International Orgtology Institute, * 05 April. Available at: https://orgtology.org/.../167-the-strategic-process-%E2... - accessed on 26 June 2021.
  5. Lee, G. K., and R. E. Cole. 2003. Internet Marketing, Business Models and Public Policy. Journal of Public Policy and Marketing 19 (Fall) 287-296.
  6. Osterwalder, A., Pigneur, Y. and C. L. Tucci. 2005. Clarifying Business Models: Origins, Present, and Future of the Concept. Communications of the Association for Information Systems 16 1-40.

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© Derek Hendrikz: 2021-07-01

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