How to design a business model

A fundamental element of business strategy, the business model describes how your company will create value. To simplify, how she will earn money. This amounts to defining your activity through its offer, its customers, its distribution channels, but also the expenses and revenues generated. This article explains how and with which tools to define a business model.

Simple, clear and explicit, this graphical representation in the form of a table is now part of the essential toolbox of any business manager.

Commonly, two expressions define a business model: we speak of economic model or, in English, of business model, the two being used interchangeably.

A business model explains or describes the efficiency or originality of a company whose main objective is to generate profit by optimizing its resources and clearly distinguishing itself from the competition. It is, in short, the concrete expression of the value creation process.

A business model therefore serves as much for the creator of a company to define his entrepreneurial project as for the manager of an existing company to guide a strategic orientation.

You still need to know how to describe your business model, in particular to present it to investors or partners. Several attempts at formalization have emerged. However, only one has gained consensus in the business world: the business model canvas or business matrix. Simple, clear and explicit, this graphical representation in the form of a table is now part of the essential toolbox of any business manager.

The business plan is also part of this toolbox. But be careful not to confuse business model and business plan! The two are nevertheless intimately linked: the business plan includes the business model which represents the essential part, the keystone.

The different uses of a business model

Describe the business model of your business

Undoubtedly, the formalization of a business economic model, usually one's own, remains the major reason for its use. A brainstorming-type approach makes it possible to reveal or clarify gray areas in one's own activity. Or at least to relativize the importance or the weighting that one grants to the activities of his company.

A means of communication

Another use is to make the business model a means of communication. Communicate with employees on the organization of the company, on the possibilities, with a common language that is both synthetic and visual.

The business model is also used to communicate with potential investors. It is a direct mode of communication, going to the essential, which is interested in the nodal points of a business whose primary objective is to decide quickly and well. Admittedly, "quickly and well" may seem paradoxical, but ultimately, the acceleration of societal changes caused by digital technology is pushing us to do so.

The business model as a source of innovation

A third way is to regularly revisit the economic model of your company in a creative or innovative dynamic. This analytical exercise is constrained by the intensity of competition, itself generated by the pressure of ever more significant technological progress.

The business model for a prospective purpose

A final approach, more based on forecasting, makes it possible to explore possible developments (environments, markets, competition, etc.). It is used to define different scenarios in order to anticipate them. This strategic watch thus makes it possible to be ready if the opportunity arises. And to use the formula dear to Winston Churchill: "Plans are of little importance, planning is fundamental. »

The canvas business model in practice

It took until 2010 and the book Business model – New generation by Alexander Osterwalder and Yves Pigneur to formalize a simple and effective reading grid for a business economic model. Taught in all business schools and universities, this method is recognized worldwide.

The business model canvas was designed to fit on an A4 sheet. It is presented in the form of a table of nine boxes grouped into three parts (see diagram below):

• the value proposition (in yellow, in the center): your offer (products, services, services offered)
• the economic equation (in blue, on the left): key partners, key activities, key resources (material, immaterial, human and financial means), cost models (variable costs and fixed costs)
• the value architecture (in green, on the right): customer relationships, customer segments, distribution channels, revenue models (money generated by the activity)

Some examples

A new business model can be emulated if it is successful. Thus, in the 1950s, McDonald's revolutionized the restaurant model by creating fast food.

What is less known and which may seem absolutely counter-intuitive is that the major part of McDonald's margins is made thanks to the income from the rental of the brand's premises to its various franchisees around the world and not by the sale of fast food. Clarifying this economic model is essential in order to extract maximum value from it.

On the other hand, in the 1960s, Toyota overturned the industry model. Its production system is based on concepts still in fashion today such as lean manufacturing, just-in-time, the quality circle, etc. Closer to home, Amazon and Netflix have also developed disruptive business models.

The same business model can be applied to different companies if they change one of the parameters of their canvas, such as their value proposition and the product sold. Among the best-known business models: direct selling companies, franchises, companies that eliminate intermediaries like Uber.

Let's take the example of the software as a service (SaaS) business model of companies that provide web applications by subscription. This is the case of Adobe, Microsoft, Salesforce, Slack, Mailchimp… Here is what their business model canvas gives.

The business model canvas has revolutionized the formalization of a business economic model essentially by its simplification. Used when creating an activity or to test the feasibility of a project, this matrix aligns the business project with its internal resources and external environment. It thus makes it possible to revisit its constantly changing economic model. Not replacing market research, the business model canvas is now part of the manager's essential toolbox for strategic analysis, alongside the SWOT, BCG matrices and Porter's forces.