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Building innovative Business Models

Introduction

The last five years have been tumultuous for corporations all over the world. Greatly admired companies like Enron have bitten the dust while those like IBM which were close to being written off, have staged a splendid recovery. Many glamorous”new economy” outfits have disappeared while “old economy” companies like Wal-Mart continue to post impressive results. Sun Microsystems, arguably one of the most innovative companies in the computer industry is in deep trouble. At the same time, software giant Microsoft faces a major challenge from Google a mere search engine which has attained a stratospheric market capitalization.

Companies exist to create value and offer it to customers for a price. Indeed, the entire economy can be viewed as a universe made up of value producing, value consuming, and value trading entities. The process of creating and exchanging value in a profitable manner is what a business model is all about. In this article, we attempt to understand what a business model is, what makes it sustainable and when an existing business model gets displaced by a new one.

Background

Business models have existed since time immemorial, though they may have been referred to by different names at different points of time. Indeed, all business models are derived from the value chain, a term closely associated with the famous management guru, Michael Porter. The activities which comprise the value chain can be divided into:

▪ Activities associated with making something: designing, purchasing raw materials, manufacturing, and so on.

▪ Activities associated with selling something: finding and reaching customers, transacting a sale, distributing the product, or delivering the service.

▪ Supporting functions such as human resources, infrastructure, and technology development.

Porter’s work is more recent. As early as 1937, Nobel Prize-winning economist Ronald Coase contended...