What’s a Business Model?

The term ‘business model’ has become a buzzword in many organizational contexts. Who hasn’t heard yet of sayings like ‘Social enterprises need a business model to become more financially independent’ or We’re gonna have to change our business model if we want to remain successful’.

Maybe we can start with the definition of a business model? The most simple definition of business model is given by Gassmann, Frankenberger & Csik in ‘The Business Model Navigator’, the authors of the ‘Magic Triangle

Who-What-How-Why

A business model defines who your customers are, what you are selling, how you produce your offering, and why your business is profitable. The first two (Who and What) address its external aspects and the second two (How and Why) address its internal dimensions.

Another very well-known instrument the Business Model Canvas from Osterwalder & Pigneur. They argue that we need “a business model concept that everybody understands, one that facilitates description and discussion. The challenge is that the concept must be simple, relevant and intuitively understandable, while not oversimplifying the complexities of how enterprises function.” They define a business model as:

unsplash.com
We believe a business model can best be described through nine basic building blocks tat show the logic of how a company intends to make money. The nine blocks cover the four main areas of a business: customers, offer, infrastructure and financial viability. The business model is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems.

Both business model instruments, as well as some derivatives and new concepts, are discussed in this learning.

Profit, Purpose and Benefits

Maybe, as a social entrepreneur, you noticed that business models always talk about profit? From the definitions above you can even deduce that the purpose of a business is to make profit, and maybe this even causes friction because you are concerned with social impact? If so, we completely understand. It took us some time as well to align the concepts of social impact and profit. And don’t worry, we’re not the only ones struggling with this integration. For example, there is a group of entrepreneurs who prefer to talk about benefit rather than profit. And also, did you know that the hybrid business is gaining momentum, and more and more research is being done on it?

Just to say, if you feel some friction we completely understand. And we hope you will persevere and join us in building the bridge between traditional business models and social work. It doesn’t matter if you start from a classic profit-oriented business, or from a social organization. Real innovation often lies in uniting opposites, and that is what social entrepreneurs do. Social entrepreneurs bridge ideologies, they focus on societal impact. And we acknowledge that it asks for multi-disciplinarity. Not only in skills but also in perspective. Social enterprises are hybrid organisations and need a multidisciplinary approach.

A Small Word on Innovation

Have you also noticed that the term business model is often used in relation to innovation? Business model innovation as the new seems like the new must-do in entrepreneurial land. What is meant when people talk about business model innovation? And is it also important for your business (idea)? Let’s check. The aim of business is to create value for your customers and at the same time capture enough value for your company to ensure a ‘going concern’. In other words make sure you make enough profit to ensure the survival of the organisation. This asks for a solid business model with a profitable profit mechanism. But with increasing competitive pressure, ongoing globalization, competitors from low cost countries, fast changing environments,… products and services easily become obsolete.
source: unsplash.com

Innovation has always been an instrumental factor in driving growth and competitiveness in business, but in most industries today it is no longer sufficient to focus on product innovation. Although quality products and services remain as ever of great importance, empirical research has shown that business model innovation carries a greater potential for success than mere product or process innovation.

Wondering about the difference between product innovation and business model innovation? Business model innovation differs from product/service innovation in that it significantly affects at least two of the four components of who-what-how-why. Whereas product innovation only changes the what. Not yet clear at this moment? Don’t worry, after you finish the first topic on the Magic Triangle, it becomes obvious.