Business Model

The holy grail of strategic thinking is, how do you come up with a business model that differentiates you and that creates value for your customers and by doing that, puts you in a unique position in your industry?

—Sam Palmisano, former chairman and CEO, IBM

At the foundation of a company is the business model. A business model is a structural description of how the organization creates, delivers, and captures value.20 While the business model receives the white-hot spotlight of attention during a company’s start-up phase, it is generally ignored and overlooked once the organization is launched. Attention then turns to sales and budgets, with little ongoing regard for the company’s foundational construct. However, those companies that continue to develop and innovate their business models have shown to outperform industry peers by nearly 7 percent in total return to shareholders over a three-year period.21 As Fortune magazine editor Geoff Colvin wrote, “Business-model innovation is the new essential competency. It’s hard. It will separate tomorrow’s winners from the losers.”22

Business Model

Figure 1.5 Business Model

If a company is functioning reasonably well, then it has a business model. The question becomes: How optimized is the business model for peak performance? Dysfunctional companies can often trace the cause of their troubles to cracks in the business model. As the definition of the business model centers on the creation, delivery, and capture of value, it is critical that these principal elements are fully explored and understood by leaders. (See Figure 1.5.)

 
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