I call this blog a discussion of new media business models. Today I hope to define “business model” by summarizing an excellent article by Joan Magretta, a former editor-at-large for the Harvard Business Review. The paper is available for sale in PDF form, but otherwise not accessible online, so I will quote from it the old-fashioned way.
Joan begins by rescuing business model from the ignominy of the dot.com era, when the term was bandied about but not necessarily applied with any rigor. A good business model, Joan writes, tells a story, about what sort of customers one is trying to attract, what they value and how the enterprise will make money by selling to or servicing them. They are useful narratives that also pass the numbers test. In other words they pencil out. The dogs will not only eat the dog food. They will pay for the dog food. Joan also defines another essential concept, called competitive strategy, which “explains how you will do better than your rivals.”
Having established this template, Joan makes her points with examples.
The American Express Traveler’s Check was born of a vacation in 1892, when banker J.C. Fargo had a hard time turning letters of credit into cash. The story of the Traveler’s Check was peace of mind and international liquidity. It penciled out because customers were willing to pay a small fee. (Nowadays, ATM cards may tell a more compelling story, but who can fault a yarn that’s worked for a century!)
EuroDisney was a business narrative based on what turned out to be the wrong assumption that Europeans would behave like Americans, when it came to spending out-of-pocket and noshing at snack bars. Neither proved correct. Europeans spent less and ate differently, causing long lines when they sat down to enjoy their meals en masse.
To illustrate the power of strategy she cites WalMart, which faced large retail competitors when it was founded in1962. Its success is at least partially explained, she writes, by quoting Sam Walton’s decision “to put good-sized stores into little one-horse towns which everybody else was ignoring.” WalMart aggregated many small markets into a mega-company (sounds like the Internet!). Other factors played a role in its rise, and the company is not universally admired, but there is no denying the success of its strategy.
With Dell Computer, Joan unifies the concepts of business model and strategy. Michael Dell’s business model was direct-selling and build-to-order. His competitive strategy was to focus on corporations rather than consumers. The combination of model and strategy worked.
In addition to defining how an enterprise relates to its customers and competitors, these concepts can unify and motivate employees. “Because a business model tells a good story, it can be used to get everyone in the organization aligned around the kind of value the company wants to create,” Joan writes. “They help individuals to see their own jobs within the larger context.”
In searching for comments on Joan’s paper, I found this thought from Rajesh Jain, a public relations executive in Bhopal, India: “Telling a story is what a web log helps to do well … . I am actually thinking aloud the business model … It would be good if more entrepreneurs actually did this. It will allow us to learn from each other. It allows us to look back at our decisions and why we made them and then reflect on whether we did the right thing or not. It’s like a real-time case study!”
“Cause if you ain’t Mass Media, you’re Mini Media.”