Business Models

Business Models

Remember those plastic models kids used to put together? I put together a few. My favorites were fighter jets. When the model was finished, I had a replica of something much too big to keep in my room. Even though it was small, I could imagine the fighter jet in all its wonder, down to the finest detail. It was neat, being able to have a small and manageable version of something so large and powerful.

Models have a more serious use as well. Aeronautical engineers make small versions of jets before they build the real thing. They want to put it to the test and make modifications after seeing its performance in a wind tunnel and under various forms of stress. Only after examining the model's performance closely do they risk the time, money, and lives to build a real jet.

Business models are like that. They help us see ahead of time what a business is likely to look like when it opens and after it has run for a certain period of time. Just as no model jet can reproduce every possible event in the life of a real jet, a business model cannot tell us everything that will happen when the real business is up and running, but it sure can help us tell whether it will fly.

Just as all airplanes have certain things in common, so all businesses have certain things in common. ALL businesses operate on the concept of value-added. A business takes something in, say raw materials, makes it more valuable, and then sells it for more than was paid for it. When the selling price per unit exceeds the total of the cost of the raw material and the cost of adding value, the business makes a profit.

Raw “materials” do not actually have to be “material.” An author takes his/her knowledge and transforms it into a book. One might say that the author takes paper or digital media and adds value by adding words. Words are free, at least so far, so the author creates something out of nothing. Remember that next time someone tells you it takes money to make money. Advertising firms take a product or service and increase the perception of its value in the eyes of the consumer. What a wonderful concept! Creativity pays. Hotel owners and managers increase our comfort and convenience by using a building a certain way.

Try this exercise. Look at each business you see today and ask yourself what the basic business model is. How do they create value by transforming something “raw” into something refined and useful? Notice which businesses do a good job of this and which ones need improvement. Think about how you would do things differently. Write down some ideas for improving the business models of businesses you know nothing about. Then, tell me what you learn!