Profit Model vs Business Model
About 2 weeks ago I read the financial report of one of our larger financial services companies in SA. Both the chairman and CEO of the group, as well as the MD of one of subsidiaries used the concept of business model frequently. The MD of the subsidiary was the only one that actually explained what he meant with his concept of business model. It was clear that he actually referred to a revenue model.
I reminded myself that Guy Kawasaki also referred to the concept of business model in his book, “The Art of the Start”. He also actually referred to a revenue model.
When compared to the work of Adrian Slywotsky and Dave Morrison, “The Profit Zone”, it is clear that there is more to a business model than a revenue model. They actually ask how we retain a part of the value we create for our customers, for ourselves. They also ask a number of other questions that take the business model beyond the revenue model.
Gary Hamel did some great work in this regard in Chapter 3 of his book, “Leading the Revolution”. He is very clear that the revenue model is but one element of a number of elements of the business model. Do yourself the favour and study this chapter!
Alex Osterwalder is an avid researcher on the topic of business models and published his book on the topic in 2009, i.e. “Business Model Generation”. In it he clearly describes 9 building blocks of the business model, of which one is the revenue model. Those of you that are interested in his work, can visit his blog at http://alexosterwalder.com/.
Wendy Jansen and her co-authors published “New Business Models for the Knowledge Economy” in 2007. In this they also state that it has definitely become more common to use an integrated form of the business model, where strategy and revenue models are integrated.
Personally I find it more useful when managers and organisations use the integrated model. Business has become much more complex than a chase after profit and revenue. Being customer centric and understanding the customer value proposition (CVP), as well as the infrastructure to deliver the CVP, has become (always has been, actually!) very important. Without it, companies are inclined to try to beat the competitor, without really understanding the needs and wants of their chosen market segment! Incrementalism and an inside-out approach seldom beats a market and outside-in approach! The first approach frequently leads to a price war due to a futile attempt to beat the competitor instead of giving the customers what they want.
All the books mentioned above are good reads and really worth having in your library. In addition, Marius Ungerer co-authored a strategy text-book, “Viable Business Strategies”, that is a very good “how to” text. Of course there are a whole host of other books on the topic. Wendy Jansen shows that in 2000 there were about 107 000 references to the topic. In 2004 there were about 2 130 000, with 602 million in 2006! Clearly it has become an important topic.
Do you know what the building blocks of your business model are?