Business Model and Five-Forces

Introduction

Business models are critical to the successful operation of a business. A business model helps with defining the fundamentals of the business – its customer base, products, financial details, revenue sources, etc. The purpose of this post is to discuss several interpretations and ideas behind the business model concept as well as five forces that can define competition and ultimately influence the business model creation.

Theory: Business Model and Five-Forces

        In the article “What Is a Business Model?” writer Andrea Ovans discusses various viewpoints of several business individuals who all define the phrase “business model” slightly different. One definition is that a business model simply defines how the business plans to make money (Ovans, 2015). Another definition takes this simple definition a step further and defines the business model term as “assumptions about what a company gets paid for” (Ovans, 2015). Another opinion states that a good business model answers questions regarding the customer value and how the organization makes money while, at the same time, delivers value to the customers at an appropriate cost (Ovans 2015). The main point Ovans highlights in her article is that an organization can define their business model in many different forms and in various complexities. It depends on what the organization values the most – whether that is just simply their overall profitability, the voice of the customer, or even a combination of these and other key activities (Ovans, 2015).

        Alexander Osterwalder takes a different approach to defining business models. In the article, “A Better Way to Think About Your Business Model” he defines a “business model canvas” which differs from a business plan in that it is helps organizations think creatively towards business model thinking (Osterwalder, 2013). This business model canvas is formed with nine building blocks which include: key partners, key activities, key resources, value propositions, customer relationships, channels, customer segments, cost structure, and revenue streams (Osterwalder, 2013). Osterwalder asserts that the business model canvas built with the nine building blocks can help an organization plan, design, and create new business models (2013).

        A theory that can be applied to business model concepts is Dr. Michael Porter’s Five Forces.  Porter suggests that profitability is driven by five competitive forces including: bargaining power of suppliers, bargaining power of buyers, threat of substitutes of products or services, threat of new entrants, and industry rivalry (Harvard Business Review, 2014).  These five forces can be applied specifically to Osterwalder’s business model canvas. The five forces can help an industry understand their own structure and thus help them create a well-informed business model canvas. For example, the bargaining power of the buyers force can put an organization under pressure to lower prices. This force can influence an organization to take an action to mitigate and reduce the buyer power, such as creating a loyalty program. This understanding of the bargaining power of the buyers helps to create a better understanding of the building block of customer relationships. The better understanding that the organization has only benefits them in creating a more refined business model.