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Business Model

A business model describes how managers of a business intend to generate revenue and profits. Also, a business model describes how an organization creates, delivers, and captures value. The financial business model describes all sources of revenues and their importance and all sources of expenses and relative amounts.

According to some sources, a business model also describes product offerings, selection criteria for employees and customers (target market), and how resources are deployed.

Chesbrough and Rosenbloom (2002) identify six components of the business model:

  • Value proposition - a description of the customer's problem, the product that addresses the problem, and the value of the product from the customer's perspective.
  • Market segment - the group of customers to target, recognizing that different market segments have different needs. Sometimes the potential of an innovation is unlocked only when a different market segment is targeted.
  • Value chain structure - the firm's position and activities in the value chain and how the firm will capture part of the value that it creates in the chain.
  • Revenue generation and margins - how revenue is generated (sales, leasing, subscription, support, etc.), the cost structure, and target profit margins.
  • Position in value network - identification of competitors, complementors, and any network effects that can be utilized to deliver more value to the customer.
  • Competitive strategy - how the company will attempt to develop a sustainable competitive advantage, for example, by means of a cost, differentiation, or niche strategy.
  • Overall a business model should answer the question How will the business generate profit and make money?

    Other questions addressed include:

    1. Who is the target customer?
    2. What customer need, problem or challenge does the business solve?
    3. What value does the product or service deliver/provide?
    4. How you reach, acquire, and retain customers?
    5. How does the business generate revenue/sales?
    6. What is the business cost structure? How much is spent on what expenses?
    7. What is the profit margin on each product/service?
    Investopedia explains that 'Business Model' is a buzzword first used (or overused) during the dotcom boom. "However, the business model dates back to the earliest days of business; it merely describes the way in which a company makes money. A business model can be simple or very complex."


    Henry Chesbrough, Open Innovation : The New Imperative for Creating and Profiting from Technology, HBS, 2003.

    Chesbrough, H. and Rosenbloom, R.S. 2002, ‘The role of the business model in capturing value from innovation: Evidence from Xerox Corporation’s technology spin-off companies’, Industrial and Corporate Change, vol. 11, no. 3, pp. 529- 555.

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