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BUSINESS MODELS

Learn everything you need to know about business models. This guide on business models was created by an ex-McKinsey consultant and includes frameworks, case studies, examples, a step-by-step design guide, and an 18-page business model PowerPoint template.

THE BIG PICTURE ON BUSINESS MODELS

1. To Grow, Get All of the Elements Right

If you think through, analyze , and correctly solve each element of the business model, your company will grow.

2. Sequentially Solve the Business Model

Strategic planning should always start with the mission , then flow through the targets, value proposition , go to market, and finally the organization .

3. Understand the Role of Each Business Model Element

Once you understand each business model element, then it is much easier to solve for the right strategies to grow.

4. Strategic Alignment is the Key to Execution

Strategic alignment is when an organization is laser-focused on developing and delivering a killer value proposition and go-to-market that beats the competition .

A BUSINESS MODEL HAS 5 CORE ELEMENTS

There are five major components to any business model:

1. The Mission   2. Targets  3. Customer Value Proposition  4. Go-to-Market  5. The Organization

The way a business model works is: " The organization efficiently & effectively develops and delivers the customer value proposition and go-to-market to fulfill the needs of the target customers better than competitors , all for the purpose of achieving the mission ."

The horizontal graphic below translates the flow of elements in a business model.

How a business model works

THE WHO, WHAT, WHY, WHERE & HOW OF BUSINESS MODELS

We can take the horizontal business model graphic and make it vertical, which is the graphic we use throughout the site.

Let's go over the big picture of the business model.

We start at the top with the "true north" representing a business' mission , vision, and values , which ultimately gives purpose and provides the "why" the company exists. An inspiring and enduring mission, vision, and values serve as a guide to align strategies, and help all employees make the   right decisions , however big or small the decisions .

We next move down to the   targets.   These include the   markets   and   geographies   ("where") the company competes in, for the business of the target   customers  ("who"). Companies that clearly define and deeply understand their targets, develop focused and aligned business models.

Next is the  value proposition , which is the "what" and the core of any business model, composed of the  business's products ,  services ,  and  pricing . Then, there is the  go-to-market , comprised of the  business's distribution ,  sales ,  and  marketing . The purpose of go-to-market is to amplify the value proposition to drive customer acquisition and loyalty.

Finally, the  organization  is organized into  functions  (e.g., sales, ops, finance). Everything the organization does is a  process  (whether defined as one or not) executed by  team members ,  partners , and  infrastructure . The organization is the execution machine and the "how" things get done in a business model. And as stated before, the organization's purpose is to efficiently and effectively develop and deliver the value proposition and go-to-market to fulfill customers' needs better than competitors, all for the purpose of achieving the mission, vision, and values.

SOLVE A BUSINESS MODEL FROM THE TOP DOWN

Let's go over a few things about business models. First, look below to see all the  different types of strategy , which are just the tip of the iceberg. Second, most companies make the mistake of solving their strategy from the bottom up, starting with functional strategies. The conversation goes something like this, "We've got our board meeting coming up. Bob, I need your ops strategy. Jane, I need your marketing strategy . Helen, I need your sales plan and strategy. Nate, give me a readout on the HR strategy ."

I equate it to trying to design a car, with the chassis, brakes, engine, and electronics team independently designing their part. In the end, it won't work. Now, let's get into a simple case study to understand better how a business model works.

SOUTHWEST AIRLINES - ONE OF THE CLEANEST BUSINESS MODELS

Finding a better example of a well-tuned business model than Southwest Airlines is hard. Starting in 1967, Southwest Airlines has grown to be the largest domestic airline in the U.S., with $20 billion in annual sales and 50,000 employees. With a deep history of award-winning service, Southwest has amassed 43 straight years of  profitability . If you were lucky enough to buy $10,000 worth of Southwest stock in 1971, it would be worth over $20,000,000 today.

TRUE NORTH - "THE "WHY"

The true north of a company includes the organization's mission, vision, and values, which provide the foundation for aligning strategies, decisions, actions, and culture . A compelling mission gives the team and organization the inspiration and the focus they need to make mission-based decisions and align their strategies. A strong vision of strategic pillars and ambitious goals provides the next level of focus for aligning the organization's strategies. And values are the foundation of expected norms and behaviors that foster a company's culture. Without a compelling mission, vision, and values, management teams often struggle with strategic focus since they try to navigate without understanding the direction of true north.

Back in 1971, Southwest's mission was so simple and effective, “Charge the lowest possible fare. And provide the highest quality service.”

Over the past 45+ years, Southwest's strategic and day-to-day decisions reinforced how they could charge the lowest possible fare and provide the highest quality service. You'll see Southwest's mission throughout Southwest's business model.

Today, Southwest's true north is encapsulated below in its purpose, vision, mission, and values.

TARGETS - THE "WHO" & "WHERE"

A business model has three primary targets:  1. Markets , 2. Customers, 3. Geographies.  The targets define the "who" and "where" of a business model. A  market  establishes the solution space a business competes in for customers. If a  leadership team  truly understands its market dynamics, it can navigate its way to a leadership position. A defined  target customer  enables an organization to tailor their value proposition better to exceed the target customers' needs. While  target geographies  focus on the execution of a business and add to economies of scale.

Well-defined targets provide an organization clarity to make better decisions and execute at a higher level. Expanding into new markets, customer segments, and geographies can lead to explosive growth when a business already has a winning value proposition in existing markets, customer segments, and geographies. However, suppose a company expands into new target markets, customers, and geographies before the value proposition and organization are ready. In that case, it can fragment focus, create shoddy execution, and overextend the business into financial distress.

Let's better understand Southwest's target market, customer segments, and geographies.

Southwest's Target Market

The output of a market strategy is a differentiated positioning within the market. Southwest competes in the highly competitive commuter airline market, which, as an industry, lost $50 billion from 2001-2012.

The idea of Southwest was born on a napkin with lines connecting the three dots titled Dallas, San Antonio, and Houston. Back in 1967, the founders of Southwest saw a hole in the commuter airline market. While the big airlines were built around national and regional hub and spoke route models, Southwest focused on intrastate point-to-point routes (initially Dallas, Houston & San Antonio). Since then, Southwest has stuck to this point-to-point route market positioning, while most other airlines relied on their hub and spoke models.

Southwest's Target Customers

You start a business to fulfill a customer's need. Southwest started a regional point-to-point airline for customers who wanted an hour-long flight rather than waste 3.5 to 4.5 hours in a car to drive from Dallas to Houston or San Antonio. Instead of spending 7 to 9 hours behind the car windshield for a day round trip, customers could be pampered by  "the best service and the most beautiful girls in the sky."  Southwest had a unique perspective on how they defined the needs of their  target customers , as stated in their 1975 Annual Report,

"We believe that in short-haul markets of up to 500 miles, the private automobile is a worthy competitor for those consumers representing the great majority of us who cannot logically place a value on time commensurate with the airfares now charged in those markets. Except for the businessman and woman market, a fare that does not compete with the cost of personal automobile travel will not permit any air market to reach its potential.

By focusing on this unmet customer need to substitute a flight for a car drive, Southwest was one of the key influencers in driving astronomical growth in U.S. domestic air travel. They attracted business customers with low fares, convenience, and service, and leisure travelers with ultra-discounted weekend tickets to drive up their plane utilization. At the time, the ultra-discounted weekend fares opened up a whole new segment of travel customers who wanted to fly for pleasure, to visit family, recreation, and to explore new destinations.

Over the past 45+ years, Southwest has continued its focus on the business and leisure customer segments, tailoring its value proposition and go-to-market to these two segments.

Southwest's Target Geographies

While Southwest Airlines now serves over 100 destinations, its deliberate geographic expansion strategy was one of the keys to Southwest's growth. In keeping with its low-cost provider mission, Southwest has always pursued a geographic density strategy to drive cost and capital synergies and utilization.

Over the six years after their 1971 launch, Southwest expanded just in Texas with routes to the Rio Grande Valley, Austin, Corpus Christi, El Paso, Lubbock, and Midland/Odessa. In 1977, Southwest's fleet of 12 737s carried 2.4 million customers, which equals 200,000 passengers per plane, or 548 passengers per plane per day. Considering the population of Texas was only 13 million people in 1977, the word-of-mouth of the new, cool, and cheap Southwest Airlines was unavoidable. This geographic focus also enabled Southwest to leverage its fixed costs related to airports, personnel, maintenance facilities, and advertising .

Southwest has always taken a highly deliberate geographic expansion strategy, choosing routes that are natural extensions of the existing route network, leading to 40 years of steady, profitable growth. Southwest has continuously focused on driving the economies of scale that a dense geographic strategy provides. Furthermore, Southwest has been extremely opportunistic with their airport selection, often focusing on lower-cost second-tier airports in a region such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore-Washington International, Oakland, San Jose, Burbank, Manchester, Providence, Ft-Lauderdale-Hollywood.

And, when Southwest expanded internationally, they made the strategic acquisition of AirTran, which had few overlapping routes but did have a robust business to the Caribbean, Mexico, and select Central American cities.

The Strategic Takeaway on Targets

Understanding, defining, and executing against target markets, customers, and geographies is core to building a killer business model. If you create a  differentiated market position,  you have a long-term vision of what you need to execute against. If you define the right target customers, you can tailor a differentiated value proposition to drive more customer value than competitors while also narrowing the scope of your go-to-market strategies. If you develop geographic density, then you reap economies of scale.

Keep your targets focused until your business and economic model are ready to scale into new markets, customer segments, and geographies. New markets, customer segments, and geographies can provide explosive growth, but only if your value proposition and economics are ready to beat the competitors in the new targets. The downfall of too many businesses is they overextend themselves by trying to expand into too many new targets, fragmenting the focus and execution of the organization.

THE VALUE PROPOSITION - THE CORE & "WHAT"

Southwest's value proposition.

Let's return to the original Southwest mission:  "Charge the lowest possible fare. And provide the highest quality service."  Frankly, it sounds like their value proposition, which is what you want in a mission statement .

Herb Kelleher, the co-founder and former CEO of Southwest, understood the customer value equation from the beginning, as he highlighted in an interview with  Strategy + Business, after being honored as a "Lifetime Strategist,"

One of the things that people, I think, didn't understand is that we started out saying we're going to give you more for less, not less for less. We're going to give you new airplanes, not old airplanes. We're going to give you the best on-time performance. We're going to give you the people who are most hospitable."

1970s Southwest Ad

Southwest's Service - Rational Benefits

In evaluating a value proposition, start with the rational benefits of the  products  and  services . Southwest's rational benefits are getting customers and their bags from point A to B through the air, which they do efficiently and competently.

They have the highest frequency of point-to-point routes, providing customers convenience and reduced travel time versus hub and spoke airlines. Southwest has the best historical on-time and baggage performance. They have a fast and convenient check-in process. In the event of a change, they have no change penalties and make it easy to book another flight. They also have the richest and easiest-to-redeem rewards program, averaging 9.5% of passenger miles flown on Rapid Rewards flights versus ~7% on other airlines.

By consistently and efficiently getting passengers and their bags from point A to B, Southwest consistently ranks as one of the top airlines in customer satisfaction.

Southwest's Service - Emotional Benefits

If you fly Southwest, you understand the difference in the emotional experience versus other airlines. It always starts with the people, and Southwest's employees have a fun, caring, and go-the-extra-mile attitude.

Then there is Southwest's physical experience of newer planes, with leather seats and extra legroom compared to other airlines in the same fare class.

Then there are the perks of free live TV, free snacks, drinks, and affordable $5 wifi and alcoholic beverages. If you're a frequent flier, they periodically send you free alcoholic beverage coupons.

There is also the emotional lift of not being taken advantage of with bag and change fees.

Southwest's service is so good, and their emotional connection with customers is so strong that they can pull off marketing campaigns centered around "Love." Imagine what a bad joke it would be if other airlines tried incorporating "love" into their  marketing .

Southwest Pricing

In 1993, the U.S. Department of Transportation coined the term the "Southwest Effect" for the rapid growth in total air travel in a city-to-city route once Southwest started to fly the route. The "Southwest Effect" is driven by their value equation, which equals benefits - price. While we've gone through the customer benefits of Southwest, let's flip to the other side of the coin:  pricing .

Historically, Southwest has been the price leader in the airline industry. With the growth of ultra-discount airlines (e.g., Frontier, Spirit), they may no longer be the ticket price leader. However, they are probably still the leader in the total cost of flying when you factor in the extra cost of bags, seat selection, change fees and the other charges of ultra-discount airlines.

Southwest utilizes its simple pricing in its #FeesDontFly  marketing campaign . While the competitive herd goes one way, Southwest goes the other way, which is the essence of  competitive differentiation .

The Strategic Takeaways on Value Propositions

A business's value proposition comprises its products, services, and pricing. The goal of a value proposition is to drive better customer value (benefits - price) than competitors. Over the past 45+ years, Southwest has consistently delivered superior customer value, leading them to grow into the largest U.S. domestic airline.

For struggling companies, the first thing to look at is the customer value proposition, which is most likely deficient versus the competition . Even for successful companies, the bottom line is to continuously focus on differentiating the value proposition to improve benefits while driving down costs, which can translate into enhanced profit or price improvement. The Customer Value Wedge is a nice visual to understand this concept better.

GO-TO-MARKET - AMPLIFYING THE VALUE PROPOSITION

The go-to-market strategy of a business model is how a company drives and fulfills the demand for products and services to customers. The three components of go-to-market include  distribution ,  sales , and  marketing . Powerful go-to-market strategies effectively and efficiently amplify the value proposition to the defined target customers.

The big strategic choice with distribution is whether to go direct, indirect, or a hybrid model of both direct and indirect channels. The big strategic goal with sales and marketing is to drive campaigns and activities to increase the size of the customer funnel and accelerate customers through the funnel.

Southwest Direct Distribution

With the rise of digital channels, distribution is currently a hotbed of disruption and innovation . Thousands of companies have cut out significant distribution costs from their value chain, by going directly to customers through digital channels .

Given Southwest's mission of low fares, in the late 90s, as Expedia, Priceline, Orbitz, and other travel websites grew, Southwest decided not to partner with third-party websites and only utilize Southwest.com as their online distribution.  At the time it was a risky move as many airline analysts said Southwest was going to suffer. However, given the strength of Southwest's value proposition and loyalty, the direct distribution strategy paid off.

For Southwest, the estimated savings are ~$700 million a year by not using the travel sites. Southwest can split the $700 million between higher profits and lower fares for customers. It is an example of driving the customer value wedge.

Distribution strategy is a critical element of any go-to-market strategy, and getting it right can be the difference between winning and losing.

Southwest Sales & Marketing

Southwest's marketing, encapsulated in their "Tranfarency" and "Love" campaigns, reflects their low fares and high-quality service mission. "Transfarency" amplifies the rational benefits of Southwest's value proposition, while "Love" amplifies the emotional benefits.

One of the main outputs of any marketing strategy is a campaign, simply a combination of messages and media. There are three media meta-channels:  advocacy, owned, and paid . The beauty of Southwest is how consistent they are in driving its brand messages across all three of these media meta-channels.

With Southwest and most B2C companies, there isn't a "Sales" element to their business model, as in most B2B business models.

Too often, companies blame marketing for their growth woes instead of addressing the lack of value in their value proposition. Two of the most successful retailers, Costco and Trader Joe's, spend almost nothing on marketing but continue to grow through the strength of their value proposition and word-of-mouth advocacy. From 2010 to 2013, Southwest kept its advertising spending almost flat but increased revenues by 46%.

The Strategic Takeaways on Go-to-Market

Too often, executives blame distribution, marketing, and sales strategies for growth woes. They usually replace their sales and marketing leaders or spend more on advertising and salespeople when they need to improve their value proposition.

Go-to-market strategies amplify a value proposition. If the value proposition is inferior to the competition, improve the value proposition and then amplify the value proposition through bigger and better go-to-market strategies.

If your business has a strong value proposition, add growth fuel by heavily investing in distribution, sales, and marketing. And align the go-to-market strategies to the target customer and their typical purchasing journey. Lastly, get the brand messaging right to tap into the rational and emotional benefits of the value proposition.

THE ORGANIZATION - THE HEART & "HOW"

The purpose of an organization is to efficiently and effectively develop and deliver the customer value proposition and go-to-market. Reflect on this for a minute. Is your role and everyone in the company focused on developing and delivering the customer value proposition and go-to-market?

Organizations are simply a collection of processes executed by a combination of people, infrastructure, and partners . The  processes are organized into functions .

There are two types of functions: 1. value chain functions and 2. support functions. Value chain functions create the value proposition and deliver and service the value proposition (i.e., logistics, product development , manufacturing, sales, marketing, and service operations). Support functions support the efficiency and effectiveness of other functions (i.e., procurement , IT, finance, HR, legal).

Solve the Top Before Getting to the Bottom

From a strategic perspective, the better the management team defines the top part of the business model, the easier it is for them to define strong organizational and functional strategies. Strategically aligning the value proposition, go-to-market, and organizational strategies to the targets and "true north" is one of the easiest ways to drive the efficiency and effectiveness of the organization.

Another critical component of organizational strategy is  core competencies , which are those capabilities that a business needs to be world-class at to develop and deliver the competitive differentiation and advantage of the business model.

Now, let's dive into how Southwest reinforces its business model through its organizational strategies. Southwest's mission and value proposition of low cost, high service is accomplished through Southwest's strategies related to  Team Members, Infrastructure, Partners, & Processes .

Southwest's Enduring Focus on People

People are the heart and soul of any organization. Southwest's mantra is "employees first, customers second, shareholders third. As co-founder of Southwest, Herb Kelleher said,  "If the employees serve the customer well, the customer comes back, and that makes the shareholders happy. It's simple, it's not a conflict, it's a chain."

Southwest has one of the most passionate and loyal workforces. They were named  the best company for work-life balance . They've ranked as high as  #13 in the Forbes Best Employer list . They've never had a layoff or cut pay.  Voluntary turnover is less than 2%.  With over 50,000 employees, Southwest does an incredible job keeping its  team members  happy, productive, and passionate. So, the question is how?

There are three main elements to a holistic people strategy :  1. org design ,  2. employee journey, and 3. culture . Let's dig into Southwest's employee journey and culture to understand how they elevate and  realize the potential of their team .

Southwest's Culture

A company's culture starts with its  values , which are reinforced by norms and the environment. Benefits and compensation are also critical to a company's culture.

It is hard to beat Southwest's culture. What other companies  celebrate their culture in their recruiting materials ? And, what other companies have a Culture Services Department and Local and Companywide Culture Committees?

It all starts with Southwest's values, which are broken up into "Live the Southwest Way" (Warrior Spirit, Servant's Heart, Fun-LUVing Attitude) and "Work the Southwest Way" (Safety and Reliability, Friendly Customer Service, and Low Costs).

Southwest norms, which define how Southwest team members interact with each other, reinforce the values. Southwest's environment (offices, planes, gates, etc.) celebrates employees, travel, and Southwest. Southwest also reinforces its values and norms with spirit parties, chili cook-offs, and Luvlines (their employee magazine).

Though Southwest is a low-price airline, its compensation is some of the highest in the industry. And they align all team members to their mission and financial performance through a generous profit-sharing plan. In 2015, Southwest paid out $620 million in profit-sharing, which amounted to over $12,000 per employee. This plan reinforces the Work the Southwest Way values. Southwest's benefits are numerous and generous. There are too many to list, but you should glance at them on  Southwest's website .

While culture may seem squishy and nebulous, a solid and enduring culture can take root in any company if you get the values right and reinforce them with norms, the environment, benefits, and compensation.

Southwest's Employee Journey

Strong companies infuse their mission and values into their  employee journey , including recruiting, hiring, onboarding , development, evaluation, and advancement. Some companies do it better than others, but great companies like Southwest are deliberate and thoughtful in their employee journey strategy.

Southwest leadership knows that starting with the right people, who inherently embody Southwest's values, is paramount to realizing its mission and preserving its culture. Southwest hires less than 2% of applicants and 6% of interviewees. Their interview process is rigorous, with group interviews, fit interviews, and a profile guide.

New hires go through a 4-week training program that trains them on the ins and outs of the job and enculturates them in the Southwest values with fun activities such as egg balancing relays and scavenger hunts. Once a team member begins to work, they are assigned a team member sponsor and participate in new hire parties and luncheons to reinforce the Southwest norms and culture.

Evaluation and advancement are based not only on a team member's skills but also on their demonstration of living the Southwest values. Team member development is reinforced through SWA University's extensive leadership and management development programs, along with continuous feedback and coaching.

There is also a continuous celebration of Southwest team members. Customers see it in the Southwest magazine with monthly articles on team members who have gone above and beyond. Southwest advertisements use team members instead of actors. Team members can give each other SWAG (Southwest Airlines Gratitude) points, utilizing an online platform that allows team members to recognize other team members for their Warrior Spirit, Servant's Heart, or Fun-LUVing Attitude.  Team members can turn their points in for gift cards and merchandise . There are also numerous employee awards, such as the Spirit Award.

Southwest has thoughtfully optimized its employee journey to elevate and realize the potential of its 50,000+ person team.

Southwest's Infrastructure

Infrastructure includes the equipment, information technology, facilities, machinery, and other physical assets a business uses. Infrastructure strategy and decisions are challenging, given the typical significant investment, sometimes long and complex implementations, against the backdrop of a continuously changing future.

In Southwest's case, its infrastructure strategy reinforces its low-cost mission. In 1971, Southwest began service with four Boeing 737s, which were introduced into the market a mere four years earlier. While competitors used 15-25 seat commuter jets for the same type of routes, Southwest's 737s seated 112 passengers, ensuring Southwest a superior cost structure once the planes were fully utilized (which took a few years). Still to this day, Southwest's fleet of 700+ planes is all Boeing 737s, compared to United Airlines, which utilizes  over 20 types of aircraft .

As stated in  Southwest's 10-K ,  "The Company's low-cost structure has historically been facilitated by Southwest's use of a single aircraft type, the Boeing 737, an operationally efficient point-to-point route structure, and highly productive employees. Southwest's use of a single aircraft type has allowed for simplified scheduling, maintenance, flight operations, and training activities."

Southwest's no-seat assignments policy massively simplifies its systems and processes, with no need to track seats and seat assignments for every plane for every flight for an entire year out.

Then there is the decision, back in the early 2000s, not to install in-flight entertainment, which would have cost multiple millions of dollars per plane and led to installation downtime. The weight of each in-seat display unit can be upwards of 13 pounds. Every pound of extra weight adds ~$1,400 per year per plane in extra fuel. 13 pounds per seat adds ~$3 million in additional operating costs per year per aircraft. In-flight entertainment didn't align with their low-cost mission. Fast forward a decade, and now Southwest has arguably the best in-flight entertainment with free live TV with BYOD (bring your own device).

Southwest has always aligned its infrastructure strategy with its mission and value proposition, leading to its unit cost leadership of 4.4 cents per available seat mile versus 5.4 to 5.8 cents for other airlines.

Southwest's Partners

Partners are all those companies that support a business. To understand the breadth of partners in a company, simply look at the accounts payable list to see all the partners. Now, while many partners are transactional, in most businesses, a few strategic partners can support the success of a business model.

In the case of Southwest, Boeing is a strong and important strategic partner. Here is an excellent quote from a  nice history of the Boeing / Southwest partnership,

"Our relationship with Southwest is about more than just delivering great airplanes," said Carolyn Corvi, vice president and general manager of the Boeing 737/757 Programs. "It's about understanding their business, trusting each other, and working together to achieve solutions. We know that while they have a lot of fun and play hard, they also run a business model that the entire industry emulates and admires. We are delighted and honored to have such a wonderful partner."

And you can see the benefits of this partnership, with Southwest often being the launch partner on Boeing's new 737 and customizing them to meet the needs of Southwest's customers. Take a look at the  737-800 MAX as an example .

Southwest's Processes

Every action in a business is a process, whether acknowledged as one or not. The key to processes is that they are lean and efficient by reducing non-value-added actions and inventory, otherwise known as waste. For Southwest, the foundation of processes is great people, infrastructure, and partners, which enables them to have super lean & low-cost processes and high plane utilization.

Just think about Southwest's quick gate turnaround, which originated as a 10-minute turnaround challenge,  which you can read about here . They only use 737s, so their turnaround teams and training are optimized on one type of plane. They don't have food carts, and they have customers and stewards clean up during deplaning. Through the profit-sharing plan, their team members are incentivized to get planes out on time and turn them around quickly.

Or, think about their no-seat assignments, which help them lean out many processes. Customer service interactions about seat assignments are non-existent, which also lowers IT costs by eliminating the complexity of seat assignments. Furthermore, the first customers to check in are the first to get their boarding number, which drives earlier check-in and better over / under-booking  metrics , eliminating the need to kick paying customers off an overbooked flight.

Southwest's lean processes also make it the historical leader in on-time and baggage performance. The collective focus on lean processes helps Southwest's team members realize their mission of being a low-cost airline.

Strategic Takeaways on Organizations

Southwest's organization efficiently and effectively develops and delivers its value proposition and go-to-market. Southwest's alignment of its entire business model from the mission to the targets to the value proposition, go-to-market, and the organization is extremely rare. So is their phenomenal revenue growth and 45 years of profitability.

BUSINESS MODEL STRATEGY

If a company doesn't have a mission or has a weak mission, fix that first. If the target markets, customers, and geographies are too broad, then focus them on the most lucrative. If the value proposition doesn't drive better customer value than the competition, then solve that. If the value proposition is strong, then focus on scaling through an improved go-to-market strategy. The more focused the top part of the business model, the easier it is to develop great organizational and functional strategies. If the business model is robust and working, then, and only then, think about expanding into new markets, customer segments, or geographies.

Every company has the potential to grow for decades, but it all comes down to strategy and execution.

If you need to develop a business model strategy, I encourage you to read  developing a strategy  or  set up some time with me  to start figuring it out.

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THE LEADERSHIP MATURITY MODEL

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Business model canvas deep dive

Business models: the toolkit to design a disruptive company

In today's fast-paced business world, having a solid understanding of business models is essential for creating a successful and disruptive company. In this deep dive article, we will explore the toolkit to design a disruptive company through the lens of the Business Model Canvas.

1. What is a business model?

Definition:.

A business model describes the rationale of how an organization creates, delivers and captures value. It can be described through 9 building blocks: Customer Segments, Value Propositions, Channels, Customer Relationships, Revenue Streams, Key Resources, Key Activities, Key Partnerships & Cost Structure.

Business Model History

Where did the term even come from?

The search to define what a business model is goes as far back as 1994, when Peter Drucker introduced the theory of the business was a set of assumptions about what a business will and won’t do in an article for the Harvard Business Review. He speaks about how companies fail to keep up with changing market conditions, as well as their duty to identify customers and competitors, their values and behaviour. Now considering that we've had businesses for over hundreds of years - it's pretty remarkable we only just came up with the term 'business model' a few decades ago!

In the middle of the 2002 dot com crisis, Joan Magretta  built on Drucker’s business definition to exclaim that business models are “at heart, stories. Stories that explain how enterprises work. A good business model answers Peter Drucker’s age-old questions: ‘Who is the customer? And what does the customer value?'

The shift from a business plan to business model goes hand-in-hand with the rise of personal computers and the use of spreadsheets. Entrepreneurs used to plan their businesses year by year, quarter by quarter, and write it down in a document almost like a book who’s copy is final. The change occurred hand in hand alongside the introduction of powerful new technology such as Microsoft Excel, enabling people to model them digitally and more accurately. Being able to calculate your entire profit and loss for a business was now available to you on a single Microsoft Excel page. This now meant businesses could be modelled before they were actually launched. Products or services could be done ahead of time in terms of calculating the business' recurring revenue, profit, marketing costs, advertising spend etc. in order to model the framework of the business.

This change in approach prompted the likes of Alexander Osterwalder and Yves Pigneur to invent the Business Model Canvas in 2005, the first ever visual business tool of its kind. Long gone are the days of having to come up with a long & highly unrealistic business plan,  trying to predict what product or service you'll be selling at the company five years from now!

What is the Business Model Canvas (BMC) ?

what-is-a-business-model-BMC-canvas

The Business Model Canvas is a strategic management and lean startup template for developing new or documenting existing business models. It is a visual tool with elements describing a company’s value proposition, infrastructure, customers and finances. It provides an organized way to lay out your assumptions about not only the key resources and key activities of your value chain, but also your value proposition, customer relationships, channels, customer segments, cost structures, and revenue streams.

It assists companies in aligning their activities by illustrating potential trade-offs by comparing them to one another and being able to see the bigger picture of their overall business framework. It's essentially taken Peter Drucker's hypothetical concept of a business 'model' and turned it into something much more tangible, that we can now see visually and use as a tool to consider all the different aspects of a single business model.

The Business Model Canvas explained in a short 2-minute video:

Why use the Business Model Canvas?

what-is-a-business-model-whyuse

Create a shared language

This concept can become a shared language that allows you to easily describe and manipulate business models to create new strategic alternatives. Without such a shared language it is difficult to systematically challenge assumptions about one’s business and innovate successfully.

Simple, visual and practical

The canvas is perfect for any good discussion, meeting, or workshop on business model innovation and creates a shared language. We need a concept that everybody understands: one that facilitates description and discussion. We need to start from the same point and talk about the same thing. The challenge is that the concept must be simple, relevant, and intuitively understandable, while not oversimplifying the complexities of how enterprises function.

Discover opportunities

By going through the process of listing the different parts of your business on the canvas, you begin to visualise and understand the different relationships between the nine building blocks that make up the tool.

Iterate quickly

Whether you’re using sticky notes on a real life Business Model Canvas or you’re designing your business model on the Strategyzer app , you can iterate on your designs very quickly. The tool enables you to prototype a first version and simply keep iterating until you’ve tested enough ideas to find product-market fit.

Read more: 14 Ways to Apply the Business Model Canvas

2. The 9 building blocks of The Business Model Canvas

We believe a business model can best be described through nine basic building blocks that show the logic of how a company intends to deliver value and make money. The nine blocks cover the three main areas of a business: desirability, viability and feasibility. The business model is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems. Let’s take a look into the three different sections:

building-blocks-DFV-canvas

Desirability

Value propositions.

The Value Proposition's Building Block describes the bundle of products and services that create value for a specific Customer Segment The Value Proposition is the reason why customers turn to one company over another. It solves a customer problem or satisfies a customer need.

Each Value Proposition consists of a selected bundle of products and/or services that caters to the requirements of a specific Customer Segment. In this sense, the Value Proposition is an aggregation, or bundle, of benefits that a company offers customers. Some Value Propositions may be innovative and represent a new or disruptive offer. Others may be similar to existing market offers, but with added features and attributes

Customer Segments

The Customer Segments Building Block defines the different groups of people or organizations an enterprise aims to reach and serve Customers are the heart of any business model. Without (profitable) customers, no company can survive for long. In order to better satisfy customers, a company may group them into distinct segments with common needs, common behaviors, or other attributes. A business model may define one or several large or small Customer Segments. An organization must make a conscious decision about which segments to serve and which segments to ignore. Once this decision is made, a business model can be carefully designed around a strong understanding of specific customer needs.

The Channels Building Block describes how a company communicates with and reaches its Customer Segments.

Channels are customer touch points that play an important role in the customer experience. Channels serve several functions, including:

  • Raising awareness among customers about a company’s products and services
  • Helping customers evaluate a company’s Value Proposition
  • Allowing customers to purchase specific products and services
  • Delivering a Value Proposition to customers
  • Providing post-purchase customer support

Customer Relationships

The Customer Relationships Building Block describes the types of relationships a company establishes with specific Customer Segments. A company should clarify the type of relationship it wants to establish with each Customer Segment. Relationships can range from personal to automated. Customer relationships may be driven by the following motivations:

  • Customer acquisition
  • Customer retention
  • Boosting sales (up-selling)

Revenue Streams

The Revenue Streams Building Block represents the cash a company generates from each Customer Segment (costs must be subtracted from revenues to create earnings).

If customers is the heart of a business model, Revenue Streams are its arteries. A company must ask itself, For what value is each Customer Segment truly willing to pay? Successfully answering that question allows the firm to generate one or more Revenue Streams from each Customer Segment. Each Revenue Stream may have different pricing mechanisms, such as fixed list prices, bargaining, auctioning, market dependent, volume dependent, or yield management.

A business model can involve two different types of Revenue Streams:

  • Transaction revenues resulting from one-time customer payments
  • Recurring revenues resulting from ongoing payments to either deliver a Value Proposition to customers or provide post-purchase customer support

Cost Structure

The Cost Structure describes all costs incurred to operate a business model. This building block describes the most important costs incurred while operating under a particular business model.

Creating and delivering value, maintaining Customer Relationships, and generating revenue all incur costs. Such costs can be calculated relatively easily after defining Key Resources, Key Activities, and Key Partnerships. Some are more cost-driven than others. So-called “no frills” airlines, for instance, have built business models entirely around low cost structures

Feasibility

The Key Resources Building Block describes the most important assets required to make a business model work Every business model requires Key Resources. These resources allow an enterprise to create and offer a Value Proposition, reach markets, maintain relationships with Customer Segments, and earn revenues.

Different Key Resources are needed depending on the type of business you are building. A microchip manufacturer requires capital-intensive production facilities, whereas a microchip designer focuses more on human resources. Key resources can be physical, financial, intellectual, or human. Key resources can be owned or leased by the company or acquired from key partners.

Key Activities

The Key Activities Building Block describes the most important things a company must do to make its business model work. Every model calls for a number of Key Activities. These are the most important actions a company must take to operate successfully. Like Key Resources, they are required to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and earn revenues. And like Key Resources, Key Activities differ depending on business model type. For software maker Microsoft, Key Activities include software development. For PC manufacturer Dell, Key Activities include supply chain management. For consultancy McKinsey, Key Activities include problem solving.

Partnerships

The Key Partnerships Building Block describes the network of suppliers and partners that make the business model work. Companies forge partnerships for many reasons, and partnerships are becoming a cornerstone of many business models. Companies create alliances to optimize, reduce risk, or acquire resources. We can distinguish between four different types of partnerships:

  • Strategic alliances between non-competitors
  • Coopetition: strategic partnerships between competitors
  • Joint ventures to develop new businesses
  • Buyer-supplier relationships to assure reliable supplies

3. Types of business models

In 2009, Amazon expands from platform to sales by launching Amazon private labels. It copies third-party sellers who created successful businesses by sourcing products absent from Amazon’s platform. Amazon sees this as an opportunity to create its own line of products.

Amazon Business Model

In 1999 Amazon launched its third-party seller marketplace and established itself as an incredibly successful e-commerce platform for other retailers. In 2007 Amazon began to use its platform to sell its own electronic devices (Kindle e-reader) and expanded to private label products under the AmazonBasics brand. While many companies aim to shift from sales to platform, Amazon executed are verse shift from platform to sales. With its private label business Amazon started to compete with third-party suppliers who are also customers of its e-commerce business. Amazon continuously expanded its private label product catalog with a wide selection (from electronics to clothing and everyday accessories) and lower prices.

The term “freemium” was coined by Jarid Lukin and popularized by venture capitalist Fred Wilson on his blog. It stands for business models, mainly Web-based, that blend free basic services with paid premium services. The freemium model is characterized by a large user base benefiting from a free, no-strings-attached offer. Most of these users never become paying customers; only a small portion, usually less than 10 percent of all users, subscribe to the paid premium services. This small base of paying users subsidizes the free users. This is possible because of the low marginal cost of serving additional free users.

In a freemium model, the key metrics to watch are:

(1) the average cost of serving a free user

(2) the rates at which free users convert to premium (paying) customers

Flickr Business Model

Flickr, the popular photo-sharing Web site acquired by Yahoo! in 2005, provides a good example of a freemium business model. Flickr users can subscribe for free to a basic account that enables them to upload and share images. The free service has certain constraints, such as limited storage space and a maximum number of uploads per month. For a small annual fee users can purchase a “pro” account and enjoy unlimited uploads and storage space, plus additional features.

Multi-sided platforms, known by economists as multi sided markets, are an important business phenomenon. They have existed for a long time, but proliferated with the rise of information technology. The Visa credit card, the Microsoft Windows operating system, the FinancialTimes, Google, the Wii game console, and Facebook are just a few examples of successful multi-sided platforms. We address them here because they represent an increasingly important business model pattern.

What exactly are multi-sided platforms? They are platforms that bring together two or more distinct but interdependent groups of customers. They create value as intermediaries by connecting these groups. Credit cards, for example, link merchants with cardholders; computer operating systems link hardware manufacturers, application developers, and users; newspapers link readers and advertisers; video gaming consoles link game developers with players.

The key is that the platform must attract and serve all groups simultaneously in order to create value. The platform’s value for a particular user group depends substantially on the number of users on the platform’s “other sides.” A video game console will only attract buyers if enough games are available for the platform. On the other hand, game developers will develop games for a new video console only if a substantial number of gamers already use it. Hence multi-sided platforms often face a “chicken and egg” dilemma.

One way multi-sided platforms solve this problem is by subsidizing a Customer Segment. Though a platform operator incurs costs by serving all customer groups, it often decides to lure one segment to the platform with an inexpensive or free Value Proposition in order to subsequently attract users of the platform’s “other side.” One difficulty multi-sided platform operators face is understanding which side to subsidize and how to price correctly to attract customers.

Multi-sided platforms bring together two or more distinct but interdependent groups of customers. Such platforms are of value to one group of customers only if the other groups of customers are also present. The platform creates value by facilitating interactions between the different groups. A multi-sided platform grows in value to the extent that it attracts more users, a phenomenon known as the network effects.

Let’s take a look into Google ’s multi-sided business model.

Google Business Model

As a multi-sided platform Google has a very distinct revenue model. It makes money from one Customer Segment, advertisers, while subsidizing free offers to two other segments: Web surfers and content owners. This is logical because the more ads it displays to Web surfers, the more it earns from advertisers. Increased advertising earnings, in turn, motivates even more content owners to become AdSense partners. Advertisers don’t directly buy advertising space from Google. They bid on ad-related keywords associated with either search terms or content on third party Web sites. The bidding occurs through an AdWords auction service: the more popular a keyword, the more an advertiser has to pay for it. The substantial revenue that Google earns from AdWords allows it to continuously improve its free offers to search engine and AdSense users.

Google’s Key Resource is its search platform, which powers three different services: Web search (Google.com), advertising (AdWords), and third-party content monetization (AdSense). These services are based on highly complex proprietary search and match making algorithms supported by an extensive IT infrastructure.

Google’s three Key Activities can be defined as follows:

1. Building and maintaining the search infrastructure.

2. Managing the three main services.

3. Promoting the platform to new users, content owners, and advertisers.

More platform business model examples: Visa, Google, eBay, Microsoft Windows, Financial Times

In 1999 Salesforce.com disrupts the customer relationship management (CRM) arena by offering CRM-as-a service over the Internet. Salesforce unlocks a new market and continuously strengthens its business model with new innovations.

Salesforce.com was founded in 1999 with the goal of “making enterprise software as easy to use as a website like amazon.com.” Salesforce pioneered the software as-a-service (Saas) for customer relationship management tools. The company didn’t stop there and has constantly improved its services and business model. We distinguish between two, non-exhaustive phases: the early business model in 1999 and extensions starting in 2005.

Salesforce Business Model

Subscription

In 2006, Spotify launches a free online music service to compete against freely available, pirated music. Its main revenue source comes from users upgrading to a premium subscription.

Spotify is a music streaming platform that gives users access to a large catalog of music. It uses a freemium revenue model that offers a basic, limited, ad-supported service for free and an unlimited premium service for a subscription fee.

Spotify relies heavily on its music algorithms and its community of users and artists to keep its premium experience delightful. Its premium subscriber base has grown from 10% of total users in 2011 to 46% in 2018.

From the start Spotify saw itself as a legal alternative to pirated music and paid song purchases on iTunes. Spotify pays a significant portion of its revenue in the form of royalties to music labels. It has paid close to $10 billion in royalties since its launch in 2006.

The company accelerated the shift from music downloads to streaming and disrupted Apple iTunes in the process. For the first time in company history, Spotify made a profit in 2019.

Spotify Business Model

4. What is business model innovation?

Business model innovation describes the innovative processes and rationale of how an business creates, delivers and captures value as opposed to how to create a new product or service. It's about fundamentally rethinking your business around a clear, new customer need, and then realigning your key resources, processes and profit formula with this new value proposition.

It’s not easy approach to take when making decisions as it pushes people out of their comfort zones. But the results can be dramatic, providing a real competitive business advantage - and we're seeing this sort of disruption a lot more often. Internet technology giants such as Amazon as world-class at demonstrating this kind of business acumen, where the founder Jeff Bezos even describes his company as 'the best place to fail in the world', referring to his company's approach to coming up with new business ideas.

Take Amazon Web Services for example: A project grew out of the company's need to improve their own tech stack performance. The American company went on to create Amazon Web Services to offers customers reliable, scalable, and inexpensive cloud computing services, paying only for what they used. Within 5-years would go on to totally dominate the cloud computing market and make Amazon over $10bn.

Read the case study we put together for Amazon Marketplace, using the business model portfolio to tell the story of how they validated their business idea: Patience is a Virtue: An Amazon Case Study in Three Parts . Otherwise you can read about the differences between organizations such as Amazon and Nestle .

4. Business Model Patterns

In the following section we outline a pattern library that is split into two categories of patterns: invent patterns to enhance new ventures and shift patterns to substantially improve an established, but deteriorating business model to make it more competitive.

www.strategyzer.comhubfs01-Hero-BusinessModelPatterns

Invent Patterns

Codify aspects of a superior business model. Each pattern helps you think through how to compete on a superior business model, beyond the traditional means of competition based on technology, product, service, or price. The best business models incorporate several patterns to outcompete others.

Shift Patterns:

02-HiltiShift-HiltiShiftCase

Codify the shift from one type of business model to another. Each pattern helps you think through how you could substantially improve your current business model by shifting it from a less competitive one to a more competitive one.

Applying Business Model Patterns

Understand patterns to better perform the following business model activities:

Design and assess

Use patterns to design better business models around market opportunities, technology innovations, or new products and services. Use them to assess the competitiveness of an existing one.

Disrupt and transform

Use patterns as an inspiration to transform your market. In the following section, we provide a library of companies that disrupted entire industries. They were the first to introduce new business model patterns in their arena.

Question and improve

Use patterns to ask better business model questions, beyond the traditional product, service, pricing, and market-related questions. Regardless, whether you are a senior leader, innovation lead, entrepreneur, investor, or faculty, you can help develop superior business models based on better questions.

03-InventPatterns-BusinessModelPatterns

Frontstage Disruption

Market explorers: unlock markets.

Develop innovative value propositions that create, unleash, or unlock completely new,  untapped, or underserved markets with large potential.

Be a pioneer and unearth new revenue potential through market exploration.

Channel Kings: Access customers

Radically change how to reach and acquire a large number of customers. Pioneer innovative new channels that haven’t been used in your industry before.

Gravity Creators: Lock in customers

Make it difficult for customers to leave or switch to competitors. Create switching costs where previously there were none and turn transactional industries into ones with long term relationships.

A great product isn’t enough to bring a flock of customers to your door. You must design a superior business model to attract and retain customers into your ecosystem. Switching costs have enabled industry leaders such as Adobe, Salesforce, Microsoft or Rolls Royce to lock customers in and outcompete other players.

Backstage Disruption

Resource castles: build moats.

Build a competitive advantage with key resources that are difficult or impossible for competitors to copy.

Activity Differentiators: Better configure activities

Radically change which activities they perform and how they combine them to create and deliver value to customers.Create innovative value propositions based on activity differentiation.

Scalers: Grow faster

Find radically new ways to scale where others stay stuck in conventional non-scalable business models.

Profit-Formula Disruption

Revenue differentiators: boost revenues.

Find innovative ways to capture value, unlock previously unprofitable markets, and/or substantially increase revenues.

Recurring Revenue – Generate recurring revenues from one-time sales. Advantages include compound revenue growth (new revenues stack up on top of existing revenues), lower cost of sales (sell once and earn recurrently), and predictability.

Bait & Hook – Lock customers in with a base product (the bait) in order to generate recurring revenues from a consumable (the hook) that customers need recurrently to benefit from the base product.

Freemium Providers – Offer basic products and services free of charge and premium services and advanced product features for a fee. The best freemium models acquire a large customer base and excel in converting a substantial percentage to paid users.

Subsidizers – Offer the full value proposition for free or cheaply by subsidizing it through a strong alternative revenue stream. This differs from freemium, which only gives free access to a basic version of products and services.

Cost Differentiators: Kill costs

Build a business model with a game-changing cost structure, not just by streamlining activities and resources, but by doing things in disruptive new ways.

Resource Dodgers – Eliminate the most costly and capital-intensive resources from your business model to create a game-changing cost structure. (Examples: Airbnb, Uber, Bharti Airtel)

Technologists – Use technology in radically new ways to create a game-changing cost structure. (Examples: WhatsApp, Skype)

Low Cost – Combine activities, resources, and partners in radically new ways to create a game-changing cost structure with disruptively low prices. (Examples: EasyJet, Ryanair, Trader Joe’s)

Margin Masters: Boost margins

Achieve significantly higher margins than competitors by focusing on what customers are willing to pay for most, while keeping your cost structure in check. Prioritize profitability over market share.

Contrarians – Significantly reduce costs and increase value at the same time. Eliminate the most costly resources, activities, and partners from your business model, even if that means limiting the value proposition. Compensate by focusing on features in the value proposition that a well-defined customer segment loves and is willing to pay for, but which are relatively cheap to provide. (Examples: CitizenM, Cirque de Soleil, Nintendo Wii)

High Enders – Create products and services at the high end of the market spectrum for a broad range of high-end customers. Use these to maximize margins and avoid the small size and extreme cost structure of a luxury niche. (Example: iPhone )

5. Business model examples

Below are 4 examples of business models. See our searchable business model examples catalog for dozens of business models analyzed using the business model canvas.

Tesla was founded in 2003 with the goal of commercializing electric vehicles, starting with luxury sports cars and then moving onto affordable, mass market vehicles. In 2008, Tesla began selling its Roadster. Its first breakthrough was in 2012 when it launched the Model S.

Tesla’s first “affordable” car, the Model 3, was announced in 2015 and produced in 2017. Prior to Tesla, the market for electric vehicles was relatively insignificant and was served by utilitarian and unremarkable models. Tesla was the first car manufacturer to view the market for electric vehicles differently: Tesla saw a significant opportunity by focusing on performance and the high end of the market.

Tesla Business Model

Learn more about Tesla’s business model by downloading your free copy of the 100-page preview of our bestselling book: The Invincible Company.

IKEA, the popular furniture company, also relies on customers as their free workforce but in a different way. Hundreds of thousands of IKEA customers assemble their bookshelves, tables, and other furniture at home after buying big boxes at big stores.

This was unthinkable before IKEA made it popular, because people used to expect furniture manufacturers to perform the assembly task. There’s a reason why customers are willing to do the work and it's because IKEA’s business model of boxed furniture offers a larger choice, immediate delivery, and all at a lower cost.

Ikea - Business Model

Read more about how Facebook, IKEA, WhatsApp, and Uber's business model make billions .

Dollar Shave Club

Dollar Shave Club (“DSC”) disrupted the market for shaving products by selling directly to consumers through its online store. Because they cut out the middleman (retail), they can pass on savings to customers. DSC makes up for the lack of established brand and distribution reach by harnessing the power of viral videos and internet marketing.

Could you access your customers in an unprecedented and scalable way? How could you cut out the middleman and create direct access to your end-customers?

Dollar Shave Club - Business Model Canvas Example

Apple is one of the leading smartphone manufacturers in the world. But their product doesn’t do it all; in fact, you could argue that there are better smartphones out there. But Apple’s business model has moats that make it extremely difficult for others to overthrow them.

Apple - iPhone - Business Model

For example Apple’s app store connects its millions of iOS users with countless software developers that supply hundreds of thousands of apps searching for an audience. It's this ecosystem that's hard to copy, not the technology. Even with the best technology it is very hard to gain market share. Only Google with its Android operating system has managed to create a competing ecosystem.

Other interesting business models: AirBnb , ARM , citizenM , Dell , Didi , Dyson , Fortnite , M-Pesa , Microsoft Windows , Patagonia , Spotify , Tupperware , Waze , Whatsapp , Zara .

6. Business model tools and resources

  • Business Model Canvas template
  • The Portfolio Map template
  • Business Model Generation masterclass
  • Business Model Generation book
  • Value Proposition Design book
  • Testing Business Ideas book
  • The Invincible Company book
  • Business Model Generation Masterclass
  • Testing Business Ideas by David Bland & Alexander Osterwalder
  • The Invincible Company: Manage a portfolio of innovation

About the speakers

Download your free copy of this whitepaper now, explore other examples.

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How to Design a Winning Business Model

  • Ramon Casadesus-Masanell
  • Joan E. Ricart

Smart companies’ business models generate cycles that, over time, make them operate more effectively.

Reprint: R1101G

Most executives believe that competing through business models is critical for success, but few have come to grips with how best to do so. One common mistake, the authors’ studies show, is enterprises’ unwavering focus on creating innovative models and evaluating their efficacy in standalone fashion—just as engineers test new technologies or products. However, the success or failure of a company’s business model depends largely on how it interacts with those of the other players in the industry. (Almost any business model will perform brilliantly if a company is lucky enough to be the only one in a market.) Because companies build them without thinking about the competition, companies routinely deploy doomed business models.

Moreover, many companies ignore the dynamic elements of business models and fail to realize that they can design business models to generate winner-take-all effects similar to the network externalities that high-tech companies such as Microsoft, eBay, and Facebook often create. A good business model creates virtuous cycles that, over time, result in competitive advantage.

Smart companies know how to strengthen their virtuous cycles, undermine those of rivals, and even use them to turn competitors’ strengths into weaknesses.

The Idea in Brief

There has never been as much interest in business models as there is today; seven out of 10 companies are trying to create innovative business models, and 98% are modifying existing ones, according to a recent survey.

However, most companies still create and evaluate business models in isolation, without considering the implications of how they will interact with rivals’ business models. This narrow view dooms many to failure.

Moreover, companies often don’t realize that business models can be designed so that they generate virtuous cycles—similar to the powerful effects high-tech firms such as Facebook, eBay, and Microsoft enjoy. These cycles, when aligned with company goals, reinforce competitive advantage.

By making the right choices, companies can strengthen their business models’ virtuous cycles, weaken those of rivals, and even use the cycles to turn competitors into complementary players.

This is neither strategy nor tactics; it’s using business models to gain competitive advantage. Indeed, companies fare poorly partly because they don’t recognize the differences between strategy, tactics, and business models.

Strategy has been the primary building block of competitiveness over the past three decades, but in the future, the quest for sustainable advantage may well begin with the business model. While the convergence of information and communication technologies in the 1990s resulted in a short-lived fascination with business models, forces such as deregulation, technological change, globalization, and sustainability have rekindled interest in the concept today. Since 2006, the IBM Institute for Business Value’s biannual Global CEO Study has reported that senior executives across industries regard developing innovative business models as a major priority. A 2009 follow-up study reveals that seven out of 10 companies are engaging in business-model innovation, and an incredible 98% are modifying their business models to some extent. Business model innovation is undoubtedly here to stay.

business model strategies for

  • RC Ramon Casadesus-Masanell is a professor at Harvard Business School and the author, with Joan E. Ricart, of “How to Design a Winning Business Model” (HBR January–February 2011).
  • JR Joan E. Ricart ( [email protected] ) is the Carl Schroder Professor of Strategic Management and Economics at IESE Business School in Barcelona.

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What Is a Business Model?

Understanding business models, evaluating successful business models, how to create a business model.

  • Business Model FAQs

The Bottom Line

Learn to understand a company's profit-making plan

business model strategies for

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

business model strategies for

Investopedia / Laura Porter

The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff.

Established businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join.

Key Takeaways

  • A business model is a company's core strategy for profitably doing business.
  • Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
  • There are dozens of types of business models including retailers, manufacturers, fee-for-service, or freemium providers.
  • The two levers of a business model are pricing and costs.
  • When evaluating a business model as an investor, consider whether the product being offered matches a true need in the market.

A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.

A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.

Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands .

When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model can make better sense of the financial data.

A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.

One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS). Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income . That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.

The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.

When evaluating a company as a possible investment, find out exactly how it makes its money (not just what it sells but how it sells it). That's the company's business model.

Types of Business Models

There are as many types of business models as there are types of business. For instance, direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .

Below are some common types of business models; note that the examples given may fall into multiple categories.

One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.

Example: Costco Wholesale

Manufacturer

A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass produced products. A manufacturer can also sell goods to distributors, retailers, or directly to customers.

Example: Ford Motor Company

Fee-for-Service

Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge by an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.

Example: DLA Piper LLP

Subscription

Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.

Example: Spotify

Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of what becoming an upgraded member can hold.

Example: LinkedIn/LinkedIn Premium

Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers a free version and a premium version.

If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.

Example: AT&T

Marketplace

Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business model attempts to make transacting easier, safer, and faster.

Example: eBay

Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.

Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni.

Razor Blade

Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component of that product. Also referred to as the "razor and blade model", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.

Example: HP (printers and ink)

"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.

Reverse Razor Blade

Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.

Example: Apple (iPhones + applications)

The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.

Example: Domino's Pizza

Pay-As-You-Go

Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.

Example: Utility companies

A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development or freight.

Example: ReMax

There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps one can take to create their plan:

  • Identify your audience. Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will understand who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
  • Define the problem. In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need, your business may struggle to find its footing if there isn't a demand for your services or products.
  • Understand your offerings. With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
  • Document your needs. With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
  • Find key partners. Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
  • Set monetization solutions. Until now, we haven't talked about how your company will make money. A business model isn't complete until it identifies how it will make money. This includes selecting the strategy or strategies above in determining your business model type. This might have been a type you had in mind but after reviewing your clients needs, a different type might now make more sense.
  • Test your model. When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.

Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.

Criticism of Business Models

Joan Magretta, the former editor of the Harvard Business Review, suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits. The airline industry is a good place to look to find a business model that stopped making sense. It includes companies that have suffered heavy losses and even bankruptcy .

For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.

However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.

As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.

Example of Business Models

Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:

  • Productivity and Business Processes: Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based off product usage (i.e. the amount of data being uploaded to SharePoint).
  • Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This also provide services and consulting.
  • More Personal Computing: Microsoft sells physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.

A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.

What Is an Example of a Business Model?

Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retails may or may not make the actual goods they sell.

What Are the Main Types of Business Models?

Retailers and manufacturers are among the primary types of business models. Manufacturers product their own goods and may or may not sell them directly to the public. Meanwhile, retails buy goods to later resell to the public.

How Do I Build a Business Model?

There are many steps to building a business model, and there is no single consistent process among business experts. In general, a business model should identify your customers, understand the problem you are trying to solve, select a business model type to determine how your clients will buy your product, and determine the ways your company will make money. It is also important to periodically review your business model; once you've launched, feel free to evaluate your plan and adjust your target audience, product line, or pricing as needed.

A company isn't just an entity that sells goods. It's an ecosystem that must have a plan in plan on who to sell to, what to sell, what to charge, and what value it is creating. A business model describes what an organization does to systematically create long-term value for its customers. After building a business model, a company should have stronger direction on how it wants to operate and what its financial future appears to be.

Harvard Business Review. " Why Business Models Matter ."

Bureau of Transportation Statistics. " Airline Travel Since 9/11 ."

Microsoft. " Annual Report 2023 ."

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What is a business model? (Plus, how to define yours)

Last updated: September 2023

Business models distill the potential of a business down to its essence. Companies across every industry and at all stages of maturity need business models. Some rely on lengthy processes to build complicated models, while others move quickly to articulate the basics and take action. Either way, having the discipline to work through this planning tool forces internal alignment.

You must build something that real people with real needs will find value in and pay for — otherwise you do not have a lasting business. Brian de Haaff Aha! co-founder and CEO

For established enterprises, a business model is often a living document that is reviewed and adapted over the years. For companies launching products and services or entering new markets, a business model helps ensure that decisions are tied back to the overall business strategy . And for early-stage startups, a simple one-page business model enables founders to explore the mechanics of a business and how you anticipate it will be successful.

Defining and documenting a business model is an essential exercise. Whether you are starting a new venture, expanding into a new market, or shifting your go-to-market strategy , you can use a business model to capture fundamental assumptions about the opportunity ahead and tactics to addressing challenges.

Unfortunately, many companies fail to integrate their business model into all aspects of the organization — from recruiting talent to motivating employees. Part of the issue is accessibility. That is why forward-thinking companies choose tools that make it possible to quickly build and share your business model. The Aha! business model canvas, for example, gives you a collaborative space to explore concepts and connect your model to everyday work.

Build a business model in Aha! Notebooks. Sign up for a free trial .

Business model large

Start using this template now

You can access the business model template shown above using Aha! Notebooks . You can also try a similar template that is built into the product strategy section of Aha! Roadmaps . Or you can download these free Excel and PowerPoint business model templates .

This guide covers the basics of business models, from core concepts to best practices. Jump ahead to any section:

Definition of a business model

Business model components

Business model vs. business plan.

Different types of business models

Pros and cons of different models

Analyzing competitor business models

Business model templates

How to build a business model

What is the definition of a business model?

A business model defines how a company will create, deliver, and capture value.

A business model answers questions that are crucial for strategic decision-making and business operations. Creating a business model for your startup or product means identifying the problem you are going to solve, the market that you will serve, the level of investment required, what products you will offer, and how you will generate revenue. Pricing and costs are the two levers that affect profitability within a given business model.

A business model is part of your overall business strategy. Some business models extend beyond economic context and include value exchange in social or cultural terms — such as the intangible impact the company will have on a community or industry. The process of constructing and changing a business model is often referred to as “business model innovation.”

15 elements of a brilliant business strategy

This is why innovation programs fail

There are three main areas of focus in a business model: value proposition, value delivery, and value capture. The proposition outlines who your customers are and what you will offer. The delivery details how you will organize the business to deliver on the proposition. And the capture is a hypothesis for how the proposition and delivery will align to return value back to the business.

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Below are some components to include when you create a business model:

Vision and mission : Overview of what you want to achieve and how you will do it.

Objectives: High-level goals that will support your vision and mission, along with how you will measure success.

Customer targets and challenges: Description of target customers (written as archetypes or personas ) and their pain points.

Solution: How your offering will solve customer pain points.

Differentiators: Characteristics that differentiate your product or service.

Pricing: What your solution will cost and how it will be sold.

Positioning and messaging: How you will communicate the value of your offering to customers.

Go-to-market: Proposed approach for launching new offerings and services.

Investment: Resources required to introduce your offering.

Growth opportunity: Ways that you will grow the business over time.

Positioning vs. messaging

  • What is value-based product development?
  • What is a go-to-market roadmap?

Business models and business plans are both elements of your overall business strategy. But there are key differences between a business model and a business plan.

A business model is seen as foundational and will not usually be reworked in reaction to shorter-term shifts — whereas a business plan is more likely to be updated based on changes in the economy or market.

Related: Business plan templates

What is the benefit of building a business model?

Innovation is about more than the products or technologies that you build. The way that you operate your business is a critical factor in how you stand apart in a crowded marketplace. The benefit of building a business model is that you can use the exercise to expose and exploit what makes your company unique — why choosing your offering is better for customers than any alternatives and how you will grow the business over time.

Many people associate business models with lengthy documents that describe a company’s problem, opportunity, and solution in the context of a two-to-five-year forecast. But business models do not need to be a long treatise.

A one-pager is just as effective for distilling and communicating the most important elements of your business strategy. The concise format is useful for sharing with broader teams so that everyone understands the high-level approach. Done right, a business model can become a touchstone for the team by outlining core differentiators to promote and defend in the market.

Related: A more comprehensive business model builder

What are the different types of business models?

There are many different types of business models. Below are some of the most common business models with example companies for reference (take note of the companies that appear in several categories):

Did you keep track of the companies that appeared in several of the business model examples? Good. You now have a grasp of how complex enterprises with vast portfolios of products and services often employ many business models within the same organization.

Consider a company like Apple, which manufactures and sells hardware products as well as offering cloud-storage, streaming subscriptions, and a marketplace for other applications. Amazon, whose offerings range from retail (with the acquisition of Whole Foods) to marketplace (Amazon.com) to subscription services (Amazon Prime and Amazon Music) to affiliate, also features in different categories. Each division or vertical will have a distinct business model that reflects the nuances of how it operates while also supporting the corporate business model.

Related: The product manager vs. the portfolio product manager

Pros and cons of different business models

Some types of business models work better for certain industries than others. For example, software-as-a-service (SaaS) companies often rely on freemium business models. This makes it easy for potential users to experience the value of the product and incentivizes paid conversions via access to additional features.

Many social media platforms make money through advertising. By providing full access to the platform for free, these companies attract more users. In turn, this creates a more valuable audience for advertisers and increases revenue for the business.

How do you analyze a competitor’s business model?

Business analysts and investors will often evaluate a company’s business model as part of due diligence for funding or market research . You can apply the same tactics to analyze a competitor’s business model — with a few caveats.

Public companies are subject to reporting requirements. This means that the business must regularly disclose financial and performance data to the public — these disclosures occur quarterly and annually. The data includes everything from gross revenue, operating costs and losses, cash flow and reserves, and leadership discussions of business results. Designed to protect and inform investors, these reports can provide you with the information you need to understand the basics of the company’s business model and how well it is performing against the model.

Private companies are not required to reveal business data publicly. Investors or partners may be privy to certain aspects of the company’s performance, but it can be difficult to understand exactly what is happening from the outside. Some analysts or business websites will attempt to “size” a business or market by looking at a variety of factors — including the number of employees, volume of search terms related to the core offering, estimated customer base, pricing structure, partnerships, advertising spend, and media coverage.

Once you have identified relevant alternatives to your offering and gathered all of the information that you can find, a good way to analyze a competitor’s business model is to conduct a competitive analysis.

Related: Competitor analysis templates

You do not want to spend too much time thinking about other companies when you could be focused on your own. A simple SWOT analysis is a helpful way to map out strengths, weaknesses, opportunities, and threats that were revealed during your research.

Below are three types of business model example layouts you can use to succinctly and objectively assess what is possible and what challenges could arise for your business.

Aha! Notebooks business model template

Articulate the foundation of your product or service in a flexible whiteboard-style format with the Aha! Notebooks business model template.

The focus is on capturing key elements like why the solution is worth buying (messaging), pain points of the buyers (customer challenges), and ways you will grow the business (growth opportunities).

Aha! Roadmaps business model canvas

The Aha! Roadmaps business model is the most complete template in this guide — based on our team's decades of experience building breakthrough products and software companies.

You can drag and drop each component within a custom layout. And once you have completed your business model, it is easy to share with your team via a live webpage or exported PDF. This business model builder is included with the free 30-day trial of Aha! Roadmaps.

Business model in Aha!

Aha! Roadmaps lean canvas

Similar to the business model canvas, this model in Aha! Roadmaps takes a problem-focused approach to create an actionable business plan. It is most commonly used by startups and entrepreneurs to document business assumptions. The focus is on quickly creating a concise and effective single-page business model. It documents nine elements, including customer segments, channels used to reach customers, and the ways you plan to make money.

Lean canvas example in Aha!

How to build a business model in 10 steps

Crafting a business model is part of establishing a meaningful business strategy. But a business model is essentially a hypothesis — you need to test yours to prove that it will actually provide value. Many startup founders especially underestimate the costs and timeline for reaching profitability.

1. Identify your target market Who will benefit from your offering? What characteristics do prospective customers share?

2. Define the problem you will solve What is the problem that you are solving? What are the pain points of your potential customers?

3. Detail your unique selling proposition (USP) What will you build and how will you support it?

4. Create a pricing strategy How much will you charge for your offering? What factors will go into choosing your price point?

5. Develop a marketing approach How will you market your product and reach target customers? What channels will you choose for go-to-market?

6. Establish operational practices How will you streamline processes and procedures to reduce overhead and fixed costs?

7. Capture path to profitability How will your business generate revenue? What level of investment will be required and what fixed costs exist?

8. Anticipate challenges Who are your competitors? What opportunities and threats exist for your business?

9. Validate your business model Was your hypothesis correct? Does your business model solve a problem the way you thought it would?

10. Update to reflect learnings What can you do differently in the future to ensure greater success?

Your business model will ultimately guide your organization and influence your product roadmap. Give it the deep thought it deserves — questioning your core assumptions about how you will generate value and how your team will work towards achieving shared goals.

Deliver more with Aha! — try it free for 30 days .

Additional strategy resources

Using Aha! software

Aha! Roadmaps — Strategy overview

Aha! Roadmaps — Strategic models

Strategic blogs and guides

  • How to price your product
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Guide to business model innovation: Strategies and examples

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In an ever-changing world, business model innovation is something every product manager and entrepreneur should focus on.

Guide To Business Model Innovation: Strategies And Examples

Business models that were solid a few months back might be irrelevant today, especially if we look at ever-increasing technological advances. If I had a penny for every business model that has had to pivot due to the advent of ChatGPT, I could retire today.

In this guide, I’ll show you how you can demystify business model innovation by simply asking the right questions.

What is a business model?

Let’s start with a high-level overview of what a business model actually is. You’ve probably already seen Strategyzer’s famous business model canvas at least once:

Business Model Canvas Template

This business model canvas is one of the most common approaches to describing a business model. It includes answers to nine key questions:

  • Customer segments — For whom are you creating value?
  • Value proposition — What value do you deliver to customers?
  • Channels — How are you reaching your customers?
  • Customer relationship — What type of relationship do you establish with your customers?
  • Key partners — Who are your key partners and suppliers?
  • Key activities — What do you need to do to deliver the value proposition for your customers?
  • Key resources — What key resources do your value proposition and distribution channels require?
  • Revenue streams — How much value do you capture from your value delivery activities?
  • Cost structure — How much does maintaining the business model cost you?

If you can get a good answer to all these questions, the overall strategy for your business is solid and self-supporting.

However, the business innovation canvas is just a template. Depending on the maturity of your company, you might need something more lightweight or more robust.

Ultimately, what you need is clarity regarding three critical areas of business operation:

  • Value creation — What value do you offer to the market?
  • Value delivery — How do you ensure the market discovers your value proposition?
  • Value capture — How do you benefit from delivering that value?

Business Model Innovation

In this article, I’ll focus on the more lightweight approach to business model innovation. It’ll make it more applicable for product managers, who often work only on a product-oriented part of the business model.

What is business model innovation?

Building a business model is similar to everything we do in a product and agile environment. Any guesses?

Yes! We do it iteratively!

In the past, we often worked thoroughly to establish a very detailed business model, probably got a company loan for that, and then spent years executing that model. In the modern world, this approach doesn’t work. Things just change too fast.

Today, business models are not planned; they are discovered. The best approach is to adjust, inspect, and adapt your business model iteratively:

Business Model Innovation Is A Circular Process

That’s what business model innovation is. It’s a never-ending, iterative process of discovering the best business model given current micro and macro circumstances.

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Strategies to innovate on your business model

Now let’s try to put the theory into practice. Although there is no “right” approach to iterating on one business model, the lightweight process I prefer involves repeatedly asking three high-level questions:

  • Can we improve the value we deliver to the market ?
  • Can we improve the way we reach our customers ?
  • Can we improve the way we capture the value along the way ?

Innovating on the value proposition

This part is the most well-known to product managers. To some extent, PMs are hired to focus chiefly on this area of the business model.

Start by visualizing your current value creation process. I like to use a double-layered value proposition model for that (my own framework).

A core value proposition includes:

  • Customer profile — Who is your target persona? What gains do they want? What pains do they experience?
  • Value canvas — How do you deliver value for your customer? Which pains do you relieve, and which gains do you create?

A category value proposition includes:

  • Market standards and benchmarks — You should meet these to be relevant
  • General performance expectations of the market — No matter how great the value proposition of your app is, people won’t use it if it takes 20 seconds to load
  • Category rules — What are the must-haves for a given type of product? For example, good luck building an email app without a labeling option

Once you have visualized your business model, start challenging it. Use quantitative data, qualitative knowledge, and market expertise to determine how to deliver more value to the market.

The most common approaches to delivering more value include:

  • Pivoting customer segments — Maybe the persona you target isn’t the right fit after all?
  • Expanding customer segments — Even if your target segment is properly defined, at some point, the market gets saturated. Maybe it’s time to expand?
  • Focusing on different pain points — Are the pain points you target most relevant for your customers?
  • Expanding offering — Can you deliver more valuable services to your customers?
  • Shrinking offering — Cutting out the noise and doubling down on your best solutions might also be a sound decision.
  • Innovating on current offering — Maybe iterating on the current offering is the most optimal way?

What you should focus on depends heavily on the data you have and the context you operate in. But if I were to give a universal tip, focus on properly balancing small bets (improving the current business model) and big bets (pivoting the business model) for the most optimal outcomes.

Innovating on value distribution

Innovating on value distribution is all about searching for the most optimal channel for acquiring users and maximizing that channel’s potential.

Let’s assume you acquire users through LinkedIn ads (performance marketing). You should revisit this strategy regularly and ask yourself two questions.

  • Embracing tactics to minimize CAC.
  • Hiring performance marketing professionals / external agencies to help you boost your reach.
  • Experimenting with new platforms.
  • Trying programmatic advertising.
  • Experiment with setting up a blog
  • Use the data you have to automatically generate new pages at a sale
  • Build virality mechanics into the app

My main tip here is the same as in the previous chapter: in an ideal scenario, you would continuously improve on both your current growth channel (small bets) while also exploring other growth channels (big bets) — especially if you haven’t reached product-channel fit yet.

Innovating on value capture

Capturing value might sound fancy, but let’s be honest — in most cases, it’s all about generating revenue.

You should regularly revisit how your product and business generate money from its operation. While the exact questions you should be asking yourself depend on your particular model, the four questions I believe every PM should ask themselves regularly are:

  • Do we have the most optimal revenue model?
  • Is the way we charge the best way?
  • Do we charge at an optimal price point?
  • Can we boost our revenue with better bundling and packaging?

1. Do we have the most optimal revenue model?

It’s a big question. If you are a subscription product , should you be a subscription product? Maybe you should try ad-based revenue, or combine both?

2. Is the way we charge the best way?

The way you charge is more important than how much you actually charge. Ideally, you should charge per value received (i.e., the number of transactions). Or, if this is impossible, per some proxy metrics (e.g., the number of seats), or a flat monthly fee. Is it the best way?

3. Do we charge at an optimal price point?

Different segments have different willingness to pay and price sensitivity . Finding the best price points to charge requires a lot of quantitative research, but it’s worth it.

In the end, increasing the price by 10 percent might be the fastest way to grow revenue or the fastest way to lose all your customers.

4. Can we boost our revenue with better bundling and packaging?

If you have a more mature product with various types of plans, consider bundling/unbundling them and experimenting with different plan settings.

Maybe there’s a gap between your tier 1 and tier 2 offering, leaving a lot of money on the table. Or, perhaps you should add to your most premium offering  a standalone, pay-per-use feature.

Sometimes, moving a feature from one plan to another can knock your revenue through the roof.

Business model innovation examples

Now that we’ve thoroughly explored the concept of business model innovation, let’s dive into some real-world examples. These cases highlight the impact that innovative business models can have on a company’s success or failure.

Netflix: Streaming revolution

One of the most well-known examples of successful business model innovation is Netflix. The company started as a DVD rental service by mail, but it quickly identified the potential of streaming technology.

By shifting its focus to on-demand streaming, Netflix transformed the way we consume entertainment and effectively disrupted the traditional cable TV industry. This strategic shift allowed the company to grow exponentially and become a global entertainment powerhouse.

Uber: Ride-sharing disruption

By leveraging then-nascent mobile app technology, Uber created a platform that connects drivers with passengers looking for a ride. This peer-to-peer model revolutionized the transportation industry, challenging traditional taxi services and expanding to other services like food delivery.

Although Uber faced regulatory hurdles and controversies along the way, it remains a prime example of how business model innovation can create a new market.

Blockbuster: A cautionary tale

On the flip side, Blockbuster’s failure to innovate its business model serves as a cautionary tale. As a movie and video game rental chain, Blockbuster was once the go-to place for home entertainment. However, the company failed to adapt to the digital age and recognize the potential of streaming services, ultimately leading to its decline.

Had Blockbuster been more agile and open to business model innovation, it might have remained a significant player in the entertainment industry.

LEGO: Reinventing the brick

LEGO, the iconic toy company, faced near bankruptcy in the early 2000s due to a lack of focus and an overly complex product portfolio. To turn things around, LEGO embraced business model innovation by refocusing on its core product — the beloved plastic brick — and expanding into new markets.

By capitalizing on brand partnerships, digital gaming, and even theme parks, LEGO successfully transformed its business model and remains a beloved brand worldwide.

Zipcar: Car-sharing pioneer

Zipcar was an early pioneer of the car-sharing model. By allowing members to rent cars by the hour or day, Zipcar offered a convenient and cost-effective alternative to traditional car ownership.

Although the company faced challenges and was eventually acquired by Avis Budget Group, its innovative business model inspired a wave of car-sharing services that continue to reshape urban transportation.

Business model innovation sounds like a big, daunting endeavor. In reality, though, it can be as complex or as straightforward as you want it to be.

I believe in simplicity. The more robust the innovation process is, the more neglected and deprioritized it often gets.

When it comes to business model innovation, I encourage you to think about it simply as an iterative process of asking the right questions. Start with the three main questions:

  • Can we improve the value we deliver to the market?
  • Can we improve the way we reach our customers?
  • Can we improve the way we capture the value along the way?

Then, step by step, go a bit deeper and ask more detailed questions.

On the one hand, you must innovate your business model in a conscious, iterative manner to stay competitive. But on the other hand, you don’t have to do it all at once. In fact, you shouldn’t.

Revisit the main questions and focus on the part of your business model that requires the most attention in your current context. Trying to innovate on a business model as a whole is a fool’s game.

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7 strategic planning models, plus 8 frameworks to help you get started

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Strategic planning is vital in defining where your business is going in the next three to five years. With the right strategic planning models and frameworks, you can uncover opportunities, identify risks, and create a strategic plan to fuel your organization’s success. We list the most popular models and frameworks and explain how you can combine them to create a strategic plan that fits your business.

A strategic plan is a great tool to help you hit your business goals . But sometimes, this tool needs to be updated to reflect new business priorities or changing market conditions. If you decide to use a model that already exists, you can benefit from a roadmap that’s already created. The model you choose can improve your knowledge of what works best in your organization, uncover unknown strengths and weaknesses, or help you find out how you can outpace your competitors.

In this article, we cover the most common strategic planning models and frameworks and explain when to use which one. Plus, get tips on how to apply them and which models and frameworks work well together. 

Strategic planning models vs. frameworks

First off: This is not a one-or-nothing scenario. You can use as many or as few strategic planning models and frameworks as you like. 

When your organization undergoes a strategic planning phase, you should first pick a model or two that you want to apply. This will provide you with a basic outline of the steps to take during the strategic planning process.

[Inline illustration] Strategic planning models vs. frameworks (Infographic)

During that process, think of strategic planning frameworks as the tools in your toolbox. Many models suggest starting with a SWOT analysis or defining your vision and mission statements first. Depending on your goals, though, you may want to apply several different frameworks throughout the strategic planning process.

For example, if you’re applying a scenario-based strategic plan, you could start with a SWOT and PEST(LE) analysis to get a better overview of your current standing. If one of the weaknesses you identify has to do with your manufacturing process, you could apply the theory of constraints to improve bottlenecks and mitigate risks. 

Now that you know the difference between the two, learn more about the seven strategic planning models, as well as the eight most commonly used frameworks that go along with them.

[Inline illustration] The seven strategic planning models (Infographic)

1. Basic model

The basic strategic planning model is ideal for establishing your company’s vision, mission, business objectives, and values. This model helps you outline the specific steps you need to take to reach your goals, monitor progress to keep everyone on target, and address issues as they arise.

If it’s your first strategic planning session, the basic model is the way to go. Later on, you can embellish it with other models to adjust or rewrite your business strategy as needed. Let’s take a look at what kinds of businesses can benefit from this strategic planning model and how to apply it.

Small businesses or organizations

Companies with little to no strategic planning experience

Organizations with few resources 

Write your mission statement. Gather your planning team and have a brainstorming session. The more ideas you can collect early in this step, the more fun and rewarding the analysis phase will feel.

Identify your organization’s goals . Setting clear business goals will increase your team’s performance and positively impact their motivation.

Outline strategies that will help you reach your goals. Ask yourself what steps you have to take in order to reach these goals and break them down into long-term, mid-term, and short-term goals .

Create action plans to implement each of the strategies above. Action plans will keep teams motivated and your organization on target.

Monitor and revise the plan as you go . As with any strategic plan, it’s important to closely monitor if your company is implementing it successfully and how you can adjust it for a better outcome.

2. Issue-based model

Also called goal-based planning model, this is essentially an extension of the basic strategic planning model. It’s a bit more dynamic and very popular for companies that want to create a more comprehensive plan.

Organizations with basic strategic planning experience

Businesses that are looking for a more comprehensive plan

Conduct a SWOT analysis . Assess your organization’s strengths, weaknesses, opportunities, and threats with a SWOT analysis to get a better overview of what your strategic plan should focus on. We’ll give into how to conduct a SWOT analysis when we get into the strategic planning frameworks below.

Identify and prioritize major issues and/or goals. Based on your SWOT analysis, identify and prioritize what your strategic plan should focus on this time around.

Develop your main strategies that address these issues and/or goals. Aim to develop one overarching strategy that addresses your highest-priority goal and/or issue to keep this process as simple as possible.

Update or create a mission and vision statement . Make sure that your business’s statements align with your new or updated strategy. If you haven’t already, this is also a chance for you to define your organization’s values.

Create action plans. These will help you address your organization’s goals, resource needs, roles, and responsibilities. 

Develop a yearly operational plan document. This model works best if your business repeats the strategic plan implementation process on an annual basis, so use a yearly operational plan to capture your goals, progress, and opportunities for next time.

Allocate resources for your year-one operational plan. Whether you need funding or dedicated team members to implement your first strategic plan, now is the time to allocate all the resources you’ll need.

Monitor and revise the strategic plan. Record your lessons learned in the operational plan so you can revisit and improve it for the next strategic planning phase.

The issue-based plan can repeat on an annual basis (or less often once you resolve the issues). It’s important to update the plan every time it’s in action to ensure it’s still doing the best it can for your organization.

You don’t have to repeat the full process every year—rather, focus on what’s a priority during this run.

3. Alignment model

This model is also called strategic alignment model (SAM) and is one of the most popular strategic planning models. It helps you align your business and IT strategies with your organization’s strategic goals. 

You’ll have to consider four equally important, yet different perspectives when applying the alignment strategic planning model:

Strategy execution: The business strategy driving the model

Technology potential: The IT strategy supporting the business strategy

Competitive potential: Emerging IT capabilities that can create new products and services

Service level: Team members dedicated to creating the best IT system in the organization

Ideally, your strategy will check off all the criteria above—however, it’s more likely you’ll have to find a compromise. 

Here’s how to create a strategic plan using the alignment model and what kinds of companies can benefit from it.

Organizations that need to fine-tune their strategies

Businesses that want to uncover issues that prevent them from aligning with their mission

Companies that want to reassess objectives or correct problem areas that prevent them from growing

Outline your organization’s mission, programs, resources, and where support is needed. Before you can improve your statements and approaches, you need to define what exactly they are.

Identify what internal processes are working and which ones aren’t. Pinpoint which processes are causing problems, creating bottlenecks , or could otherwise use improving. Then prioritize which internal processes will have the biggest positive impact on your business.

Identify solutions. Work with the respective teams when you’re creating a new strategy to benefit from their experience and perspective on the current situation.

Update your strategic plan with the solutions. Update your strategic plan and monitor if implementing it is setting your business up for improvement or growth. If not, you may have to return to the drawing board and update your strategic plan with new solutions.

4. Scenario model

The scenario model works great if you combine it with other models like the basic or issue-based model. This model is particularly helpful if you need to consider external factors as well. These can be government regulations, technical, or demographic changes that may impact your business.

Organizations trying to identify strategic issues and goals caused by external factors

Identify external factors that influence your organization. For example, you should consider demographic, regulation, or environmental factors.

Review the worst case scenario the above factors could have on your organization. If you know what the worst case scenario for your business looks like, it’ll be much easier to prepare for it. Besides, it’ll take some of the pressure and surprise out of the mix, should a scenario similar to the one you create actually occur.

Identify and discuss two additional hypothetical organizational scenarios. On top of your worst case scenario, you’ll also want to define the best case and average case scenarios. Keep in mind that the worst case scenario from the previous step can often provoke strong motivation to change your organization for the better. However, discussing the other two will allow you to focus on the positive—the opportunities your business may have ahead.

Identify and suggest potential strategies or solutions. Everyone on the team should now brainstorm different ways your business could potentially respond to each of the three scenarios. Discuss the proposed strategies as a team afterward.

Uncover common considerations or strategies for your organization. There’s a good chance that your teammates come up with similar solutions. Decide which ones you like best as a team or create a new one together.

Identify the most likely scenario and the most reasonable strategy. Finally, examine which of the three scenarios is most likely to occur in the next three to five years and how your business should respond to potential changes.

5. Self-organizing model

Also called the organic planning model, the self-organizing model is a bit different from the linear approaches of the other models. You’ll have to be very patient with this method. 

This strategic planning model is all about focusing on the learning and growing process rather than achieving a specific goal. Since the organic model concentrates on continuous improvement , the process is never really over.

Large organizations that can afford to take their time

Businesses that prefer a more naturalistic, organic planning approach that revolves around common values, communication, and shared reflection

Companies that have a clear understanding of their vision

Define and communicate your organization’s cultural values . Your team can only think clearly and with solutions in mind when they have a clear understanding of your organization's values.

Communicate the planning group’s vision for the organization. Define and communicate the vision with everyone involved in the strategic planning process. This will align everyone’s ideas with your company’s vision.

Discuss what processes will help realize the organization’s vision on a regular basis. Meet every quarter to discuss strategies or tactics that will move your organization closer to realizing your vision.

6. Real-time model

This fluid model can help organizations that deal with rapid changes to their work environment. There are three levels of success in the real-time model: 

Organizational: At the organizational level, you’re forming strategies in response to opportunities or trends.

Programmatic: At the programmatic level, you have to decide how to respond to specific outcomes or environmental changes.

Operational: On the operational level, you will study internal systems, policies, and people to develop a strategy for your company.

Figuring out your competitive advantage can be difficult, but this is absolutely crucial to ensure success. Whether it’s a unique asset or strength your organization has or an outstanding execution of services or programs—it’s important that you can set yourself apart from others in the industry to succeed.

Companies that need to react quickly to changing environments

Businesses that are seeking new tools to help them align with their organizational strategy

Define your mission and vision statement. If you ever feel stuck formulating your company’s mission or vision statement, take a look at those of others. Maybe Asana’s vision statement sparks some inspiration.

Research, understand, and learn from competitor strategy and market trends. Pick a handful of competitors in your industry and find out how they’ve created success for themselves. How did they handle setbacks or challenges? What kinds of challenges did they even encounter? Are these common scenarios in the market? Learn from your competitors by finding out as much as you can about them.

Study external environments. At this point, you can combine the real-time model with the scenario model to find solutions to threats and opportunities outside of your control.

Conduct a SWOT analysis of your internal processes, systems, and resources. Besides the external factors your team has to consider, it’s also important to look at your company’s internal environment and how well you’re prepared for different scenarios.

Develop a strategy. Discuss the results of your SWOT analysis to develop a business strategy that builds toward organizational, programmatic, and operational success.

Rinse and repeat. Monitor how well the new strategy is working for your organization and repeat the planning process as needed to ensure you’re on top or, perhaps, ahead of the game. 

7. Inspirational model

This last strategic planning model is perfect to inspire and energize your team as they work toward your organization’s goals. It’s also a great way to introduce or reconnect your employees to your business strategy after a merger or acquisition.

Businesses with a dynamic and inspired start-up culture

Organizations looking for inspiration to reinvigorate the creative process

Companies looking for quick solutions and strategy shifts

Gather your team to discuss an inspirational vision for your organization. The more people you can gather for this process, the more input you will receive.

Brainstorm big, hairy audacious goals and ideas. Encouraging your team not to hold back with ideas that may seem ridiculous will do two things: for one, it will mitigate the fear of contributing bad ideas. But more importantly, it may lead to a genius idea or suggestion that your team wouldn’t have thought of if they felt like they had to think inside of the box.

Assess your organization’s resources. Find out if your company has the resources to implement your new ideas. If they don’t, you’ll have to either adjust your strategy or allocate more resources.

Develop a strategy balancing your resources and brainstorming ideas. Far-fetched ideas can grow into amazing opportunities but they can also bear great risk. Make sure to balance ideas with your strategic direction. 

Now, let’s dive into the most commonly used strategic frameworks.

8. SWOT analysis framework

One of the most popular strategic planning frameworks is the SWOT analysis . A SWOT analysis is a great first step in identifying areas of opportunity and risk—which can help you create a strategic plan that accounts for growth and prepares for threats.

SWOT stands for strengths, weaknesses, opportunities, and threats. Here’s an example:

[Inline illustration] SWOT analysis (Example)

9. OKRs framework

A big part of strategic planning is setting goals for your company. That’s where OKRs come into play. 

OKRs stand for objective and key results—this goal-setting framework helps your organization set and achieve goals. It provides a somewhat holistic approach that you can use to connect your team’s work to your organization’s big-picture goals.  When team members understand how their individual work contributes to the organization’s success, they tend to be more motivated and produce better results

10. Balanced scorecard (BSC) framework

The balanced scorecard is a popular strategic framework for businesses that want to take a more holistic approach rather than just focus on their financial performance. It was designed by David Norton and Robert Kaplan in the 1990s, it’s used by companies around the globe to: 

Communicate goals

Align their team’s daily work with their company’s strategy

Prioritize products, services, and projects

Monitor their progress toward their strategic goals

Your balanced scorecard will outline four main business perspectives:

Customers or clients , meaning their value, satisfaction, and/or retention

Financial , meaning your effectiveness in using resources and your financial performance

Internal process , meaning your business’s quality and efficiency

Organizational capacity , meaning your organizational culture, infrastructure and technology, and human resources

With the help of a strategy map, you can visualize and communicate how your company is creating value. A strategy map is a simple graphic that shows cause-and-effect connections between strategic objectives. 

The balanced scorecard framework is an amazing tool to use from outlining your mission, vision, and values all the way to implementing your strategic plan .

You can use an integration like Lucidchart to create strategy maps for your business in Asana.

11. Porter’s Five Forces framework

If you’re using the real-time strategic planning model, Porter’s Five Forces are a great framework to apply. You can use it to find out what your product’s or service’s competitive advantage is before entering the market.

Developed by Michael E. Porter , the framework outlines five forces you have to be aware of and monitor:

[Inline illustration] Porter’s Five Forces framework (Infographic)

Threat of new industry entrants: Any new entry into the market results in increased pressure on prices and costs. 

Competition in the industry: The more competitors that exist, the more difficult it will be for you to create value in the market with your product or service.

Bargaining power of suppliers: Suppliers can wield more power if there are less alternatives for buyers or it’s expensive, time consuming, or difficult to switch to a different supplier.

Bargaining power of buyers: Buyers can wield more power if the same product or service is available elsewhere with little to no difference in quality.

Threat of substitutes: If another company already covers the market’s needs, you’ll have to create a better product or service or make it available for a lower price at the same quality in order to compete.

Remember, industry structures aren’t static. The more dynamic your strategic plan is, the better you’ll be able to compete in a market.

12. VRIO framework

The VRIO framework is another strategic planning tool designed to help you evaluate your competitive advantage. VRIO stands for value, rarity, imitability, and organization.

It’s a resource-based theory developed by Jay Barney. With this framework, you can study your firmed resources and find out whether or not your company can transform them into sustained competitive advantages. 

Firmed resources can be tangible (e.g., cash, tools, inventory, etc.) or intangible (e.g., copyrights, trademarks, organizational culture, etc.). Whether these resources will actually help your business once you enter the market depends on four qualities:

Valuable : Will this resource either increase your revenue or decrease your costs and thereby create value for your business?

Rare : Are the resources you’re using rare or can others use your resources as well and therefore easily provide the same product or service?

Inimitable : Are your resources either inimitable or non-substitutable? In other words, how unique and complex are your resources?

Organizational: Are you organized enough to use your resources in a way that captures their value, rarity, and inimitability?

It’s important that your resources check all the boxes above so you can ensure that you have sustained competitive advantage over others in the industry.

13. Theory of Constraints (TOC) framework

If the reason you’re currently in a strategic planning process is because you’re trying to mitigate risks or uncover issues that could hurt your business—this framework should be in your toolkit.

The theory of constraints (TOC) is a problem-solving framework that can help you identify limiting factors or bottlenecks preventing your organization from hitting OKRs or KPIs . 

Whether it’s a policy, market, or recourse constraint—you can apply the theory of constraints to solve potential problems, respond to issues, and empower your team to improve their work with the resources they have.

14. PEST/PESTLE analysis framework

The idea of the PEST analysis is similar to that of the SWOT analysis except that you’re focusing on external factors and solutions. It’s a great framework to combine with the scenario-based strategic planning model as it helps you define external factors connected to your business’s success.

PEST stands for political, economic, sociological, and technological factors. Depending on your business model, you may want to expand this framework to include legal and environmental factors as well (PESTLE). These are the most common factors you can include in a PESTLE analysis:

Political: Taxes, trade tariffs, conflicts

Economic: Interest and inflation rate, economic growth patterns, unemployment rate

Social: Demographics, education, media, health

Technological: Communication, information technology, research and development, patents

Legal: Regulatory bodies, environmental regulations, consumer protection

Environmental: Climate, geographical location, environmental offsets

15. Hoshin Kanri framework

Hoshin Kanri is a great tool to communicate and implement strategic goals. It’s a planning system that involves the entire organization in the strategic planning process. The term is Japanese and stands for “compass management” and is also known as policy management. 

This strategic planning framework is a top-down approach that starts with your leadership team defining long-term goals which are then aligned and communicated with every team member in the company. 

You should hold regular meetings to monitor progress and update the timeline to ensure that every teammate’s contributions are aligned with the overarching company goals.

Stick to your strategic goals

Whether you’re a small business just starting out or a nonprofit organization with decades of experience, strategic planning is a crucial step in your journey to success. 

If you’re looking for a tool that can help you and your team define, organize, and implement your strategic goals, Asana is here to help. Our goal-setting software allows you to connect all of your team members in one place, visualize progress, and stay on target.

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How To Create A Business Model In Seven Steps

Define the problem you’re going to solve, then define the customers for which the problem will be solved. Next, identify the customer and the problem. After that, define a set of possible solutions. After, define a set of possible monetization strategies for that solution, test, and choose your business model .

Table of Contents

A business model design in seven steps

Time needed:  1 day

How to create a business model in one day and seven simple steps

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The most valuable asset any organization has is its business model .

Indeed, that is the way all the moving parts of the organization fit together to create a value chain.

The aim of the value chain is value creation for several players in that industry, market, and so on.

The business model is not static, it changes and evolves along with the scale of the organization.

The type of  business model you designed for your company will not work if your company scales. You’ll need to rethink and redefine it.

This is even more evident in companies that are trying to innovate.

When those organizations create a new technology or an innovative approach to existing industries, it is critical to understand who are the players involved in that industry and how you’re creating value for them.

In this blog, we covered the business models  of many organizations.

For instance, Google’s massive success is strictly connected to its business model .

The company managed to create a balance between several players in the publishing and information industry where each of those players gets back some value (economic and not) from having a relationship with Google .

Where do you start when it comes to creating a business model ?

Related : Successful Types of Business Models You Need to Know

It’s all about business model design

The primary aim of a business model is to create a sustainable chain, able to unlock value for several players in a market, industry, or niche .

Therefore, this value chain will start from a value proposition , a promise you make to the key players and partners in that market, industry, or niche depending on where you start.

For instance, when PayPal started out it didn’t look to dominate the whole market. It started from a niche .

As Pether Thiel put it in his book, Zero to One:

The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.

Indeed, PayPal began by identifying its most valuable partner, what at the time they called “power user.”

That was a choice driven by its business model design .

Therefore, instead of focusing on generically offering a service for everyone, PayPal focused on acquiring and attracting as many power users as possible.

Those power users were mostly on another platform that had already scaled up: eBay.

Thus, PayPal focused all its effort on acquiring those power users from eBay , fast!

Only after PayPal had drafted, tested, and validated a clear value proposition for a small , yet critical group of power users, it could move on to take larger and larger segments of that market.

What is a value proposition?

At its most basic level, a value proposition is a promise you make as an organization to deliver something (either monetary or advantage) to a critical player you have in our industry.

For instance, when Google started it showed right away it was capable of offering 10x of search results, at a faster speed and more relevant to users.

However, had Google kept its search engine primarily focused on providing paid results, it would not have taken off.

Instead, Google focused on offering relevant paid results but also a bunch of organic results.

In short, Google managed to index and rank the web pages from blogs, journals, news sites and any other website that made those pages available to Google for its index.

In exchange for that content, Google offered back visibility as qualified traffic toward those sites.

Indeed, search engines back then (at the end of the 1990s) were not focused on offering quality traffic.

Thus, most of the audience you got back to your site might have been quite relevant to your business.

Google instead, with its dominant search engine allowed publishers, and businesses (small and large) to gain customers.

That sealed an implicit deal “Me (Google) will send you qualified traffic that helps you grow your business if you (publisher, business, or whoever publishes on the web) offer me your content to be indexed.”

We might call that an implicit contract, which is the beginning of a value chain.

In fact, from this sort of contract part of the Google business model has been built. Imagine the scenario where Google was not attractive enough to provide qualified traffic to content producers.

They would have stopped offering their content for free by blocking access to the search engine.

Instead, they allowed Google to index their pages because the visibility they got was too attractive.

A business model is also about how you make money but how you make money isn’t your business model

One of the biggest misconceptions of the business model is to confuse it with the monetization strategy or the revenue model of the company.

While this is an essential piece of the puzzle, it is just one of the components of a successful business model .

In this blog, we’ve discussed at great length how companies make money  as a way to start the discussion of a business model .

However, a business model implies the understanding of

operations, customer acquisition and retention, supply chain management, and the cost above and revenue aspects

According to the business model you designed over the years for your organization there will be a piece that plays a more critical role compared to others.

For instance, a vital component of the Coca-Cola business model is its distribution strategy .

For other companies like McDonald’s, the key to its business model success is the heavily franchised restaurants that helped the company scale up all over the world.

Each company will develop a unique  model  among the many types of business models which is what makes it thick in the long run!

What principles should I follow to create and design a business model?

Developing a deep understanding of your business model implies asking a few critical questions. For instance, some of those questions might be:

  • What value do I offer my potential customers? Or what problem do I solve with my product/service?
  • How do I charge my customers?
  • What does my acquisition cost look like?
  • What channels can I tap into to find my ideal customer?
  • Did I create a predictable revenue stream ? If not what can I do to generate that?

Your business model will be based on a few critical assumptions about who your customers are, how your product or service should look like, what are the favorite channels to reach them, and a few others.

Those assumptions will be tested as soon as you start kicking off your operations.

Your main concern should be just that. You need to check those assumptions as quickly as possible. 

Steve Blank has identified 17 principles in his  Customer Development Manifesto :

  • There Are No Facts Inside Your Building, So Get Outside
  • Pair Customer Development with Agile Development
  • Failure is an Integral Part of the   Search for the Business Model
  • If You’re Afraid to Fail You’re Destined to Do So
  • Iterations and Pivots are Driven by Insight
  • Validate Your Hypotheses with Experiments
  • Success Begins with Buy-In from Investors and Co-Founders
  • No Business Plan Survives First Contact with Customers
  • Not All Startups Are Alike
  • Startup Metrics are Different from Existing Companies
  • Agree on Market Type – It Changes Everything
  • Fast, Fearless Decision-Making, Cycle Time, Speed and Tempo
  • If it’s not About Passion, You’re Dead the Day You Opened your Doors
  • Startup Titles and Functions Are Very Different from a Company’s
  • Preserve Cash While Searching. After It’s Found, Spend
  • Communicate and Share Learning
  • Startups Demand Comfort with Chaos and Uncertainty

I suggest you read this manifesto over and over again. This should be the first step!

What tools can you use to design and create your business model?

One of the most used tools to design and create a business model has revolved around the customer development manifesto above.

However, it is essential to keep in mind that this manifesto was the fruit of an era where venture capital had become scarce compared to the dot-com bubble at the end of the 1990s.

Those tools for business modeling have been developed in that context. Thus, those are not a one-size-fits-all toolbox but rather work better in a context where capital is scarce, and you need to test your business model assumptions as quickly as possible. In that context three primary tools are:

  • Business model canvas.
  • Lean startup canvas.
  • Customer development canvas.

Those tools can be used by entrepreneurs in the phases of the business model generation:

  • Map the business model hypotheses.
  • Test these hypotheses with customer feedback.
  • Iterative this process.

The result will be an incremental development of a product that will reach a minimally viable version .

The better the product, based on customer feedback, the larger the audience it will reach.

Lean makes sense when capital is scarce and when you need to keep burn rates low.

Lean was designed to   inform the founders’ vision  while they operated frugally at speed. It was not built as a focus group for consensus for those without deep convictions .

Is the lean startup still a valuable model?

As Steve Blank has pointed out in an HBR article entitled “ Is the Lean Startup Dead? “

I realized it was time for a new startup heuristic: the amount of customer discovery and product-market fit you need to find is inversely proportional to the amount and availability of risk capital.

In other words, the more risk capital that is available on the market the least the lean startup model might work.

The reason is, that if you have massive risk capital, you won’t need to test all your assumptions.

Quite the opposite, you’ll need to execute them fast.

Also, one of the primary logic of the lean startup is to burn cash at the slowest rate possible, while evolving (so-called pivoting) your business model .

If money is not an issue, then why go for the lean startup?

Steve Blank went further:

Rather than the “first mover advantage” of the last bubble ,  today’s theory is that  “massive capital infusion owns the entire market.”

Therefore, if you secured a massive injection of money, then your aim might be primarily toward growth , rather than profits.

In that context, the lean startup might not work!

Are capital moats sustainable?

blitzscaling-business-model-innovation-canvas

When a company or startup has a substantial capital allocate for growth , that is when this injection can become a short-term competitive advantage.

However, as companies finance growth through artificial injection of capital, those also become extremely risky, because many of the assumptions underlying the business model can’t be tested organically, thus leaving the company’s foundations weak.

An example of this excess of use of capital as a competitive moat has been WeWork , which has proved one of the most disastrous business endeavors of the last decade.

Thus, capital moats and technological moats need to be balanced with careful business model testing and organic validation in the marketplace!

Key Highlights

  • This step is the foundation of your business model . It involves identifying a specific problem that your product or service aims to solve.
  • Problems can be functional (solving a practical need) or emotional (addressing a psychological desire or pain point).
  • Defining the problem clearly helps you focus on delivering value to your target audience.
  • Once the problem is defined, it’s important to identify the individuals or groups who are facing this problem. These are your potential customers.
  • Group your potential customers into categories, keeping it to a maximum of three types. Each type may have distinct characteristics and needs.
  • From the categories of potential customers and the identified problems, narrow your focus to one key customer type and one specific problem.
  • This step helps prevent spreading your resources too thin and allows you to concentrate on understanding your primary audience and addressing their primary need.
  • Brainstorm a range of solutions that could address the key problem for your chosen customer type.
  • List up to ten solutions. Then, evaluate these solutions based on feasibility, cost, time, and resources required.
  • Narrow down the list to three solutions that are viable given your constraints.
  • For the solution you’ve chosen, consider how you’ll monetize it. Determine how your business will generate revenue from providing the solution to your target customers.
  • Brainstorm up to five potential monetization strategies. These could include subscription models, one-time purchases, freemium offerings, etc.
  • Focus on the two strategies that can be tested quickly and efficiently.
  • This step involves practical validation of your selected solution and monetization strategies.
  • Test your product or service with real customers to gather feedback. Evaluate how well your monetization strategies perform in real-world scenarios.
  • Based on the feedback and data collected, choose the most effective solution and monetization strategy combination.
  • With a validated solution, monetization strategy , and a clear understanding of your target audience, you have the foundation of your business model .
  • Your business model is the blueprint that outlines how your company will create, deliver, and capture value in the market.
  • Continuously monitor and refine your business model as you gather more insights from customers and adapt to changing market conditions.

Create Your Business Model Idea In Less Than A Minute!

With our Business Model Idea generator, you can craft the perfect business model idea, in less than a minute, by leveraging AI, to help you find the first version of the building blocks needed to build a successful business model !

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What Is Business Strategy & Why Is It Important?

overhead view of business strategy meeting

  • 20 Oct 2022

Every business leader wants their organization to succeed. Turning a profit and satisfying stakeholders are worthy objectives but aren’t feasible without an effective business strategy.

To attain success, leaders must hone their skills and set clear business goals by crafting a strategy that creates value for the firm, customers, suppliers, and employees. Here's an overview of business strategy and why it's essential to your company’s success.

Access your free e-book today.

What’s a Business Strategy?

Business strategy is the strategic initiatives a company pursues to create value for the organization and its stakeholders and gain a competitive advantage in the market. This strategy is crucial to a company's success and is needed before any goods or services are produced or delivered.

According to Harvard Business School Online's Business Strategy course, an effective strategy is built around three key questions:

  • How can my business create value for customers?
  • How can my business create value for employees?
  • How can my business create value by collaborating with suppliers?

Many promising business initiatives don’t come to fruition because the company failed to build its strategy around value creation. Creativity is important in business , but a company won't last without prioritizing value.

The Importance of Business Strategy

A business strategy is foundational to a company's success. It helps leaders set organizational goals and gives companies a competitive edge. It determines various business factors, including:

  • Price: How to price goods and services based on customer satisfaction and cost of raw materials
  • Suppliers: Whether to source materials sustainably and from which suppliers
  • Employee recruitment: How to attract and maintain talent
  • Resource allocation: How to allocate resources effectively

Without a clear business strategy, a company can't create value and is unlikely to succeed.

Creating Value

To craft a successful business strategy, it's necessary to obtain a thorough understanding of value creation. In the online course Business Strategy , Harvard Business School Professor Felix Oberholzer-Gee explains that, at its core, value represents a difference. For example, the difference between a customer's willingness to pay for a good or service and its price represents the value the business has created for the customer. This difference can be visualized with a tool known as the value stick.

The value stick has four components, representing the value a strategy can bring different stakeholders.

The value stick framework

  • Willingness to pay (WTP) : The maximum amount a customer is willing to pay for a company's goods or services
  • Price : The actual price of the goods or services
  • Cost : The cost of the raw materials required to produce the goods or services
  • Willingness to sell (WTS) : The lowest amount suppliers are willing to receive for raw materials, or the minimum employees are willing to earn for their work

The difference between each component represents the value created for each stakeholder. A business strategy seeks to widen these gaps, increasing the value created by the firm’s endeavors.

Increasing Customer Delight

The difference between a customer's WTP and the price is known as customer delight . An effective business strategy creates value for customers by raising their WTP or decreasing the price of the company’s goods or services. The larger the difference between the two, the more value is created for customers.

A company might focus on increasing WTP with its marketing strategy. Effective market research can help a company set its pricing strategy by determining target customers' WTP and finding ways to increase it. For example, a business might differentiate itself and increase customer loyalty by incorporating sustainability into its business strategy. By aligning its values with its target audiences', an organization can effectively raise consumers' WTP.

Increasing Firm Margin

The value created for the firm is the difference between the price of an item and its cost to produce. This difference is known as the firm’s margin and represents the strategy's financial success. One metric used to quantify this margin is return on invested capital (ROIC) . This metric compares a business's operating income with the capital necessary to generate it. The formula for ROIC is:

Return on Invested Capital = Net Operating Cost After Tax (NOCAT) / Invested Capital (IC)

ROIC tells investors how successful a company is at turning its investments into profit. By raising WTP, a company can risk increasing prices, thereby increasing firm margin. Business leaders can also increase this metric by decreasing their costs. For example, sustainability initiatives—in addition to raising WTP—can lower production costs by using fewer or more sustainable resources. By focusing on the triple bottom line , a firm can simultaneously increase customer delight and margin.

Increasing Supplier Surplus & Employee Satisfaction

By decreasing suppliers' WTS, or increasing costs, a company can create value for suppliers—or supplier surplus . Since increasing costs isn't sustainable, an effective business strategy seeks to create value for suppliers by decreasing WTS. How a company accomplishes this varies. For example, a brick-and-mortar company might partner with vendors to showcase its products in exchange for a discount. Suppliers may also be willing to offer a discount in exchange for a long-term contract.

In addition to supplier WTS, companies are also responsible for creating value for another key stakeholder: its employees. The difference between employee compensation and the minimum they're willing to receive is employee satisfaction . There are several ways companies can increase this difference, including:

  • Increasing compensation: While most companies hesitate to raise salaries, some have found success in doing so. For example, Dan Price, CEO of Gravity Payments, increased his company's minimum wage to $80,000 per year and enjoyed substantial growth and publicity as a result.
  • Increasing benefits: Companies can also decrease WTS by making working conditions more desirable to prospective employees. Some offer remote or hybrid working opportunities to give employees more flexibility. Several have also started offering four-day work weeks , often experiencing increased productivity as a result.

There are several ways to increase supplier surplus and employee satisfaction without hurting the company's bottom line. Unfortunately, most managers only devote seven percent of their time to developing employees and engaging stakeholders. Yet, a successful strategy creates value for every stakeholder—both internal and external.

Business Strategy | Simplify Strategy to Make the Greatest Business Impact | Learn More

Strategy Implementation

Crafting a business strategy is just the first step in the process. Implementation takes a strategy from formulation to execution . Successful implementation includes the following steps :

  • Establish clear goals and key performance indicators (KPIs)
  • Set expectations and ensure employees are aware of their roles and responsibilities
  • Delegate work and allocate resources effectively
  • Put the plan into action and continuously monitor its progress
  • Adjust your plan as necessary
  • Ensure your team has what they need to succeed and agrees on the desired outcome
  • Evaluate the results of the plan

Throughout the process, it's important to remember to adjust your plan throughout its execution but to avoid second-guessing your decisions. Striking this balance is challenging, but crucial to a business strategy's success.

How to Formulate a Successful Business Strategy | Access Your Free E-Book | Download Now

Learn More About Creating a Successful Business Strategy

Business strategy constantly evolves with changing consumer expectations and market conditions. For this reason, business leaders should continuously educate themselves on creating and executing an effective strategy.

One of the best ways to stay up-to-date on best practices is to take an online course, such as HBS Online's Business Strategy program. The course will provide guidance on creating a value-driven strategy for your business.

Do you want to learn how to craft an effective business strategy and create value for your company's stakeholders? Explore our online course Business Strategy , or other strategy courses , to develop your strategic planning skills. To determine which strategy course is right for you, download our free flowchart .

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Asset-light Business Model: Strategies for Hotels During the Pandemic

Source: Photo by Winui on Shutterstock

By Kwanglim Seo , Ph.D., Associate Professor, University of Hawaii, Manoa – School of Travel Industry Management

Introduction

It is not surprising that an asset-light business model (ALBM) has fundamentally reshaped the hotel industry, because it focuses primarily on operations rather than investments in physical assets. Recently, shared economy-based businesses like Uber and Airbnb, which thrive on the ALBM, have proven to be successful. Many major hotel brand companies that are adopting the ALBM have increasingly divested their real estate properties and concentrated on managing and franchising hotels. For example, at year-end 2020, Marriott International controlled approximately 1,423,044 rooms worldwide ‒ and nearly 99 percent of them, or 1,407,144 rooms, were operating under management contracts and/or franchise agreements. Another major global hotel group, Hilton, operated 1,019,287 rooms in 2020, of which 999,887 rooms ‒ 98 percent of the entire portfolio ‒ were managed or franchised. This dramatic shift in asset ownership reflects a recent global trend for the hotel landscape. 

The most recent wake-up call for hotel companies came in the form of the global financial crisis of 2007-2008 led by an asset bubble in the real estate market. Holding a significant number of hotel properties, these companies realized they were highly exposed to risks associated with real estate investments, such as depreciation, high leverage, high operational and financing costs, and low liquidity. Increased risks and costs also limited their ability to respond to and capitalize on potential investment opportunities. Failure to take on any positive investment projects could adversely affect growth prospects and profitability in the long term. To overcome these challenges, hotel companies have been looking for new ways to bring down operational costs and minimize risks associated with owning real estate properties. The asset-light business model is proving to be an effective approach taken by large global hotel chain companies. 

In general, academic researchers and practitioners seem to agree that the ALBM provides more benefits than traditional brick-and-mortar business models, including higher profitability, stable cash flow, and lower risk. For instance, recent academic research found that lodging firms adopting ALBM demonstrated superior performance while increasing the efficiencies of investments (Seo & Soh, 2019; Seo et al., 2021). The initial focus in embracing this business model was to separate the owner of the real estate from the operators to help each party concentrate on what they do best. In particular, the ALBM has proven successful for hotel companies through a focus on achieving scale and establishing brands: two important competitive advantages in the hotel industry.

Competitive advantages of ALBM

Competitive advantage is critical to the success of a business. From a resource-based perspective, efficient allocation of limited resources is key to developing competitive advantages, and ALBM can help hotel companies do this in several ways. First, the cost savings that result from reducing the commitment to real estate assets and outsourcing capital investment responsibilities allow hotels to achieve cost-efficiency advantages. In addition, expansion and growth through franchising can achieve economies of scale without the need to invest large amounts of capital in many diverse locations. Capitalizing on scale generally leads to revenue growth with minimal incremental cost through more centralized and streamlined processes. 

Second, reducing capital requirements for large investment projects leaves more cash available for developing and strengthening core competencies that can help create superior value to customers. That is, saved cash can be allocated to developing core competencies that improve management of hotels and franchise brands. Investment in effective marketing, property management, and revenue management practices; efficient reservation systems; rigorous training and educational programs; and up-to-date information technologies will ultimately contribute to the establishment of strong brands through the delivery of excellent services and products. The financial flexibility gained by keeping costs and operations lean is becoming increasingly important as hotel companies are required to quickly respond to changing environments and market conditions. 

ALBM and the COVID-19 environment 

The world is undergoing potentially the worst economic crisis in modern history caused by the COVID-19 pandemic, and the hotel industry is one of the hardest hit by the virus. However, with the rollout of vaccines and therapeutic treatments for COVID-19 and the easing of travel restrictions, a slow but gradual recovery of tourism is anticipated. Despite hope for a strong economic recovery, hotel companies will likely face new challenges in promoting health and safety assurances. In particular, hotels that commit to ALBM must ensure that all hotels operating under their flags follow the same health and safety protocols to make them clean and safe for customers as well as employees. Meeting this new standard will require them to take a fresh look at their competitive advantages.

From a strategic investment perspective, the area of health and hygiene has been relatively overlooked by many hotels. In the wake of the COVID-19 pandemic, however, health and safety assurance has become not only an important consideration for travelers but a necessary requirement. It is clear that investing in effective health and safety procedures could help hotels develop a new competitive advantage by gaining the trust of travelers and setting them apart from their competitors. Many chain hotel companies have already implemented more stringent hygiene and cleaning measures and adopted stronger health and safety standards to meet their customers’ needs. For example, Marriott International launched Global Cleanliness Council, a multi-faceted platform to strengthen its cleanliness standards to meet the new health and safety challenges presented by the COVID-19 pandemic. Hilton also developed The Clean Safety Program that includes upgraded processes and training for employees to provide guests with a safe and clean environment during their stay.

With an increased focus on health and safety, the role of technology is becoming more important in creating safer practices and environments. While hotels have always been interested in employing innovative technologies, they must reevaluate and recreate their investment strategies from an entirely new perspective that is suitable for the post-pandemic era. For instance, previous investments in advanced technologies, such as mobile check-in and check-out, were derived primarily from the customer-experience point of view rather than from a safety and cleanliness perspective. However, they must reconfigure and repurpose their IT investments to help optimize efficiency in establishing and communicating the sense of security to their customers. In particular, technology investments that facilitate touchless and contactless services and transactions are crucial as they can effectively reduce health and safety concerns by minimizing exposure to employees and other guests. Some hotel companies have adopted artificial intelligence-based technologies, such as Google Assistant and Amazon Alexa, that help avoid unnecessary human interactions and thereby decrease the likelihood of spreading viruses and germs. Others have incorporated advanced messaging systems that support real-time communication with their guests on property, which also contributes to a contactless and personalized experience.   

The pandemic has provided both challenges and opportunities for hotel companies. Not only is it changing the way people perceive their health and well-being during travel, but it’s making hotels adopt cutting-edge technologies to serve their guests safely. Hotels adopting the asset-light business model have more flexibility in allocating and reconfiguring their resources to improve and establish hygiene and safety measures and practices. However, investments in technologies to develop and implement these measures must be carefully evaluated and executed. For instance, expansion and growth via the asset-light strategy may not be sustainable if hotels cannot effectively incorporate and maintain new hygiene practices and/or standards across the system. Multi-national chains will have to strategically plan their investments across different segments and countries, as the recovery may occur at different paces in different places. The asset-light strategy ‒ keeping lean ‒ is not sufficient by itself, but the right-asset strategy ‒ investing in the assets that are right for the company ‒ is becoming a more critical factor for success. Therefore, it is more important than ever before for hotel companies to utilize and assign limited resources to maintain advantage in a competitive industry.

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Seo, K., Woo, L., Mun, S.G., & Soh, J. (2021). The asset-light business model and firm performance in complex and dynamic environments: The dynamic capabilities view. Tourism Management, 85.

Seo, K., & Soh, J. (2019). Asset-light business model: An examination of investment-cash flow sensitivities and return on invested capital. International Journal of Hospitality Management, 78, 169-178. 

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  • “Beyond GBS” organizations strengthen their ownership of end-to-end outcomes. They run GBS like a business in terms of performance, cost, and service levels, and they attract more attention from the C-suite.
  • They lead digitization initiatives, scale their best practices internally using consistent structures and processes globally, and provide new value-added services adjacent to their core delivery.
  • Implementing this model involves building a robust digital and data backbone, fostering internal partnerships, and redefining the GBS mandate to include value-added activities beyond traditional transactional processes.

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/ article, transforming global business services into a strategic function.

By  Fabrice Roghé ,  Sascha Kleebaur , and  Kai Sondermann

Key Takeaways

Once a revolutionary organization inside many companies, global business services (GBS) today stands at a crossroads. Created in the 1990s to centralize transactional tasks for finance, HR, and other internal units, many GBS functions have reached a strategic tipping point—requiring corporate leaders to make crucial decisions on the future of their GBS organizations.

A recent BCG study showed that only 41% of companies believe that GBS creates value. With that in mind, the leaders of these support functions must raise their game at a time when companies around the world face unprecedented challenges in how they operate. Marginal adjustments to GBS strategy are no longer sufficient.

As the limitations of traditional models become evident, GBS must transition from a purely operational role to a more strategic one. Although global business service organizations have been at the forefront of change in the past, they now need to reinvent themselves to build support and enabling functions that are more resilient, flexible, and scalable. They also need to expand their charters and provide more value-added activities such as collections and payments, customer management, and even sales functions.

The next generation of GBS functions are becoming more closely intertwined with corporate success—and the GBS model, as a key amplifier of change, is about to take center stage, creating value beyond its legacy contributions. GBS can lead the transformation of areas such as customer experience , operations , and worker training. This requires corporations to adopt a new mindset—and a new framework that we call “Beyond GBS.”

A Bold Vision for Global Business Services

Under the traditional GBS model, C-suite and GBS executives alike have focused largely on consolidating tasks, maximizing transactional processing efficiency, and minimizing costs by bundling resources and operating from low-cost locations around the world.

But the legacy model may have hit its limits: between 2009 and 2021, overhead costs—as measured by sales and general administration—grew 35% more than overall corporate margins, giving rise to what’s known as the “GBS value dilemma.”

This creates three imperatives for GBS organizations:

  • To further strengthen their ownership of end-to-end outcomes
  • To run GBS like a business in terms of performance, cost, and service levels
  • To attract more attention from the C-suite

The “Beyond GBS” model puts these imperatives into practice. It offers a bold vision, strategy, mandate, and governance structure that is aligned with the company’s strategic direction and initiatives and promoted by the group, business, and functional leadership. “Beyond GBS” organizations lead digitization initiatives, scale their best practices internally around the world using consistent structures and processes, and provide new value-added services adjacent to their core delivery.

Taking Support Functions to the Next Level

“Beyond GBS” is the highest of five levels in the support-function journey. At the first, or bottom, level are the roughly 15% of companies that either have no GBS function or have standalone centers siloed across multiple geographies. Companies at this level suffer the most: one company we’ve studied has 117,000 accounting cost centers for 72,000 employees, 150 reporting lines between shared services and the business units they support, and a $5 billion gap in cost optimization versus their peers.

The second level, representing 40% of companies, are those organizations still running multifunctional service factories. The third level and fourth levels, each representing another 20% of companies, consist of organizations with integrated global support functions.

The fifth, and highest, level consists of the roughly 5% of all companies who have gone beyond GBS. These companies have digitized transactional activities and developed effective platform deliveries and end-to-end solutions. They achieve all this while rebalancing workloads seamlessly between global worksites.

Reaching this top level remains a challenge for many companies. In our experience, GBS organizations achieve roughly 80% of the potential gains—the low-hanging fruit, in other words—if they depend on labor arbitrage, process efficiencies, and the first-time digitization of processes. Despite the complexity and high costs of most GBS initiatives, GBS teams tend to hit an early ceiling and incremental improvements tend to be small. This is particularly true for laggard GBS functions, which represent about two-thirds of all organizations.

The success of GBS organizations is mainly limited by weakly aligned top-management GBS priorities, a nonaligned target picture, and subsequently having a very rigid governance and ineffective steering of the GBS model. Leapfrogging from a less mature GBS model to an advanced one has only proven successful in isolated cases, given the lack of synchronized implementation across the organization. Thus, rather than focusing on incremental improvement of traditional practices—which add value for no more than 10% of companies—companies need to completely rethink and redesign the GBS function.

How to Get Started

Before implementing the best practices of the “Beyond GBS” model, corporate leaders must ensure that they have a firm foundation in place. That starts with an enhanced digital and data backbone with the latest technology solutions and continues with the following three building blocks:

  • An agile internal customer front line that brings GBS close to its customers and fosters rapid delivery of services and a responsive iteration of new offerings
  • A highly effective delivery platform that drives exceptional operations, focuses on value-adding activities, and attracts high-quality employees
  • A digital innovation center that delivers a steady stream of new capabilities and technologies, enabling constant improvement in the GBS unit’s interfaces and delivery platforms

Assured that a solid foundation is in place, organizations can then begin implementing the “Beyond GBS” model. There are five steps companies should take to unlock the most business value:

1. Forge internal “value partnerships.” This step repositions GBS teams from a siloed, transactional processing unit to a partner that can help other business units optimize their processes to create total company value through outcome- and impact-based solutions.

2. Boldly rescope your mandate. Leaders need to think beyond the transactional core mindset of the past to a bolder, broader, and even more radical vision of what GBS can provide. To be sure, transactional processing cannot be ignored. But by embracing AI and analytics, GBS can play a valuable role in ESG and compliance reporting and user experience design—all with a clear link to overall strategy and business outcomes. Once the foundation is secured, GBS leaders have an opportunity to sell the CEO and C-suite team on a broader charter.

3. Expand talent and capability access. To expand beyond extended-workbench thinking requires the creation of vibrant capability hubs and global capability teams that provide nonclassical GBS services, including R&D and other center-of-expertise activities. This shift allows these services to collocate to locations with the best mix of cost and talent. At the same time, attracting and retaining the best talent remain priorities and can be enhanced with upskilling and cross-skilling initiatives. This approach places greater emphasis on expertise and digital capabilities.

4. Rethink global ways of working. This critical step moves teams beyond the obligatory, if not forced, cross-functional and organizational alignment to a new model promoting institutionalized global ownership. This includes a globally organized mandate and the formation of distributed teams with global coverage. The goal is to maximize the contribution of global team members. GBS leaders can play a key role in fostering global functional ownership that enhances the contributions of these global teams.

5. Build in scale and resilience. The optimal setup for a “Beyond GBS” approach is a platform-based operating and technology model that provides agility, flexibility, and a healthy redundancy of globalized and localized services along a multicapability hub infrastructure that leverages external partners. The three key components of this model are a customer-centric interface, an agile (and digital) “center of competence,” and a global network of shared delivery platforms managed by the GBS team and vendors as needed. This setup ensures the company is globally resilient even as it scales—and enables the company to continuously rebalance workloads based on the geopolitical climate.

In the “Beyond GBS” model, vibrant service hubs are built around a globally consistent, modular approach that enables new “plug-and-play” services. This approach also allows for the collocation of noncore GBS functions at hubs to leverage GBS’s infrastructure costs and capabilities in the broader organizational ecosystem.

The main objective, of course, is to attract and retain the best talent while operating at the lowest costs. In addition, building out core process standards atop a digital and data backbone based on the latest tech solutions will create even more value. Leading these efforts are GBS’s global process owners, who will shape service operations globally and lead process optimization and digitization initiatives.

The evolution of the traditional GBS function into a more strategic business unit creates vast new opportunities for companies. By expanding beyond its historic back-office role, GBS teams can provide real value and drive impact rather than maintaining rigid structures and services. Solutions will become innovative and highly customized. And most important, “Beyond GBS” functions operate as business-like entities—actively managed by leading talent and measured against clear outcomes.

Headshot of BCG expert Fabrice Roghé Managing Director & Senior Partner

Managing Director & Senior Partner

Sascha-Kleebaur.jpg

Partner and Associate Director

Kai Sondermann

Partner and Associate Director, Organization Transformation

ABOUT BOSTON CONSULTING GROUP

Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.

Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.

© Boston Consulting Group 2024. All rights reserved.

For information or permission to reprint, please contact BCG at [email protected] . To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com . Follow Boston Consulting Group on Facebook and X (formerly Twitter) .

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Ceo vision 2024: crafting a strategic roadmap for business and technology synergy.

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The new year marks the commencement of insightful dialogues surrounding emerging trends, innovative technologies, progressive business strategies and engaging interviews with esteemed industry leaders. To enable sustained growth, every organization will need to define its trajectory for business and technology progression. They will need to make crucial choices on technology adoption, how to ensure a seamless blend between bots and humans, enhance customer interactions and ensure strategic deployment of generative AI.

There is no better way to start a new calendar year than to sit down and pen down thoughts on growth plans and strategies. Here’s what I think the technology industry will be up against in the coming year.

Customer experience will be a key focus area for technology professionals in 2024.

Every situation is different. Every organization is different. One of the most essential things for technology professionals and consultants is to build a great customer experience. Often, technology professionals may be in the back of the corner, distancing themselves from the customer. That is not an ideal scenario.

You really need to understand the customer. Go out and talk to your customers. Get in the trenches with your customer. Understand how they’re interacting with your organization. Also, speak to business stakeholders interacting with your customers to get a better and deeper understanding of precisely what they want.

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Best 5% interest savings accounts of 2024, successful alignment of technology investments with critical business strategies is the key..

The value of technology and successful technology investments depends on organizations. When we walk into organizations, we witness 40 to 50 different technology projects running simultaneously. When reviewing their extensive list of prioritized projects, it becomes evident that numerous initiatives lack the desired impact, often resulting in inefficiencies and suboptimal outcomes.

When I meet with customers and talk about the technology they're using to realize business results, I witness that there is more focus on ad-hoc implementation than strategic vision. Businesses should focus more on strategies. They should try to realize the business vision and achieve the intended results. Technology is just a tool that helps us do that.

The most crucial thing the technology department in a company—or the CIO or CTO—can do is ensure that all tech initiatives are attached to a key business strategy. Everyone should be aligned on what the most critical business strategies are. Technology initiatives should be aligned explicitly with prioritized business.

At my company, we are putting this into practice so that our customers can focus their resources on the more important things to achieve growth.

Lessons learned from the past year must influence decision-making in the coming year.

Last year, Synoptek replaced many of its systems and upgraded platforms to new ones, affecting everyone in the company. During this process, there are a few things we realized we need to keep in mind as we help our customers going forward.

First, the business and the people who own its processes must be fully engaged while partnering on the technology projects to be successful.

Second, there needs to be a structured methodology. We must paint a true picture of what the future will be in a clear way and, more specifically, why we are doing it.

Third, we often forget how people are affected by changing systems. They are trying to do their jobs effectively. Suddenly, we take all the systems and change how they work, introducing new processes, and things don't work as they initially thought. Setting their expectations, training them sufficiently and helping them through that transition is essential.

To ensure every stakeholder saw and agreed on the plan to make things happen, we found that the most effective way was to have "executive envision" workshops. These workshops helped our people talk openly and honestly about the business challenges and then design appropriate solutions. By spending a little bit of time in two or three sessions, we gathered information from everyone and outlined solutions that solved the big problems.

Organizations must brace for top tech and business challenges.

In today’s volatile world, companies will need to be agile and able to operate in the event of an unexpected outcome or need to build a pivot. They must set up a solid technology foundation in the cloud.

Next, whether companies are growing or pivoting, any change will bring vulnerability, which opens the door to many bad actors. So, they must chart out a risk and compliance framework to protect data and intellectual property and keep systems running.

We should all be grateful for the job we get to do.

For example, due to this role, I can talk to hundreds of our customers every year, and I get to witness first-hand in these interactions how technology is used to do legendary things.

The technology industry is constantly innovating, and seeing how our customers utilize these advancements to accomplish tasks that were once deemed impossible is truly exciting.

It’s also thrilling to be in this age of generative AI, intelligent automation and NLP models and witness their capabilities in fueling innovation and human interaction.

Closing Thoughts

In today’s technology landscape, the possibilities are truly remarkable. To drive strategic success, it's imperative to enhance tech initiatives that can tangibly transform and elevate your business.

Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives. Do I qualify?

Timothy Britt

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eCommerce: Key Player Insights

Temu business model 2024: surpassing shein, wish & alibaba, temu's online marketplace: low prices, low quality online shopping platform temu is taking the world in a sweeping motion, but what is it that makes this retailer so successful ecdb examined the data, and here are the results. february 09, 2024.

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Temu new (blue)

Temu's Business Model: Key Insights

Recent Launch, Notable Rise : Temu, the online marketplace based in Boston, launched in September 2022. Its website traffic and app downloads experienced their most notable surge in May 2023, nearly doubling from the month before.

Innovative Strategy : Temu integrates shopping with entertainment, offering features such as group buying and social referrals. Based on GWS data, users dedicate twice as much time on Temu compared to other renowned shopping apps.

Controversial Reputation : Critics argue that Temu's strategy of instant customer feedback promotes environmental harm, worker exploitation, and design imitation. Investigators have identified instances of quick to break products and confirmed instances of toxic substances in product materials.

Temu (pronounced ‘ tee-moo ’) has captured the world's attention, leaving some wondering: What is it that makes this Boston-based online marketplace different from other emerging players in eCommerce? 

Founded by Pinduoduo’s parent company PDD Holding, Temu's business model is akin to Chinese shopping platforms Shein, Wish, and Alibaba – but Temu is already surpassing the others in popularity, according to statistics.  Apart from offering products in bulk at astonishingly low prices, what sets Temu apart? Let's get into it.

Quick Facts About Temu

You do not know anything about Temu yet? Temu is a eCommerce platform founded in the USA with ties to Shanghai. Here is a quick overview.

Established in the USA in 2022, Temu operates as a subsidiary of PDD Holdings Inc., a company listed on Nasdaq and headquartered in Shanghai.

Temu functions as an online marketplace similar to AliExpress, Walmart, and Wish, focusing on offering affordable goods.

The company serves as an intermediary between sellers, predominantly from China, and buyers, without managing its own inventory.

Temu promotes social commerce, incentivizing prospective customers to recruit more buyers to unlock discounts (social referral programs).

The app utilizes gamification to engage customers and offers free shipping by circumventing customs duties . 

Getting Into the Numbers

As we recently posted in our insight on Temu's download numbers , the shopping app is becoming increasingly popular on Google Play and the App Store.

Number of Global Downloads of Shopping App Temu 2022-2023

Having started out with about 440.000 downloads after the app's initial launch in September 2022, download numbers continued to rise steadily until April 2023, when they reached 15.3 million downloads. After that there was a sudden spike of about 98% month-over-month, so that by May 2023, the app had been downloaded more than 30 million times. This was most likely due to the increased media attention Temu received. After a short dip in June 2023, the number of downloads increased steadily again, reaching more than 40.5 million app downloads in September 2023.

Company List banner 2

But app downloads are not the only way to measure the traffic Temu generates. Recent data from Similarweb shows an additional perspective: The number of visits to Temu's browser site, temu.com. 

Compared to the app downloads, the number of visits to temu.com is significantly higher, but this is to be expected since visiting a website in a browser requires less effort than downloading the app on a mobile device. However, the same spike from April to May 2023 occurred on the website, rising by 96.5% from 110.6 million visits in April to 217.3 million in May. Similar to app downloads, the heightened global media coverage of Temu is expected to have had a major influence on website traffic. 

But why is Temu so interesting?

Temu’s wide range of products is particularly appealing to consumers, combined with a gamified online shopping experience that encourages customers to try their luck and spend more time on the website or app.  

And this strategy seems to be working , as app engagement data analysis by GWS shows that Temu manages to capture user attention longer than other popular shopping apps. See the specifics below.

Average Time Each U.S. Consumer Spends Time Every Day on the Following Shopping Apps, 2023

Over the course of one year, from September 2022 to September 2023, GWS traced consumer behavior on their Android smartphones 24 hours a day, seven days a week. And the results are astonishing. On average, users are spending double the amount of time per day on Temu (22 minutes) than on Amazon (11 minutes). App engagement on Shein is similarly outpaced by Temu’s app as Amazon, since users spend on average merely one daily minute more on Shein (12 minutes). 

It looks like Temu has figured out how to motivate consumers to engage with their platform. But what is it exactly that Temu does different? Here are five key aspects of what the app offers.

Temu: The Company's Five Core Strategies and Tactics 

The obvious reasons to buy from Temu are low prices, free shipping, and discounts. Like Shein, Wish, and Alibaba, Temu’s business model is built on undercutting what consumers are used to spending on items. Temu differentiates itself from other platforms by offering free shipping and returns to customers, which is made possible by PDD Holding’s extensive network of suppliers and shipping partners.  

An efficient logistics network is not to be underestimated , as problems with supply and distribution networks are seen as a major factor in the failure of Alibaba and Wish to break into the Western market.  

Temu offers even more discounts and lower prices than Shein, with special offers such as items sold for as little as one cent. 

Combining Shopping and Entertainment

One-fifth of online shoppers in the U.S. say they miss the in-store shopping experience when they shop online. Temu aims to bridge this gap by introducing games into the shopping process. By playing games like Fishland, Coin Spin, Card Flip, and others, you can win rewards that ultimately lead to more time spent on the site and a dopamine rush from winning free items. 

To keep people playing these games, however, the app relies heavily on referrals, another core business strategy.

Shared Shopping Experience

Group Buying is a familiar concept in Asia that Temu is extending to its Western customer base. Essentially, it increases customers’ bargaining power by forming groups to share a bulk discount. 

This plays into the aforementioned referral program, which gives discounts to customers who bring new clients to the app and enables a shared shopping experience.

Affiliate Programs and Heavy Advertising

As Shein has already proven effective, Temu sends free items to a large number of influencers and micro-influencers to promote Temu on YouTube and TikTok. A younger customer base of users under the age of 35 is particularly attractive to Temu, as younger users are typically less able and willing to pay large sums for products. 

Similarweb’s data on the age distribution of Temu’s audience confirms this claim. But there is more to it. Have a look below. 

Age Distribution of Audience on Temu.com, 2023

The data shows that the largest age segment of consumers using temu.com are 25-34 year olds, representing 21% of the audience. This is followed by the next largest age group (35-44) at 20%. While older age groups are incrementally less represented in Temu’s audience, as seen with 18% of 45-54 year olds and 16% of users aged 55 to 64, the youngest age group (18 to 24 years) is next to lowest among the age groups using the site (13%). Only consumers over 64 years are less represented (12%). Thus, Similarweb's audience analysis points out that the shopping site attracts consumer interest across a wide age range . 

Although Temu's heavy social media influencer marketing is known to reach mostly younger consumers, the site's low-price strategy and addictive gamification feature seem to resonate with older users as well.

As a final tactic, there is the instant relay of consumer feedback , already popularized by Temu's competitor Shein. 

Real-Time Shopping: Cost-Effectiveness vs. Plagiarism and Exploitation

Temu’s most innovative and effective strategy is also highly ambivalent and criticized. Similar to Shein, Temu uses a reverse-manufacturing model that relays customer feedback directly to manufacturers. Starting off with smaller quantities that are offered on the marketplace, products in high demand are reordered, while others are replaced.  

According to Temu, this results in environmental efficiency because product inventory is aligned with customer demand in real time. In addition, a greater variety of products can be offered than with traditional retail strategies. With this method, Shein was able to launch 150,000 new items in 2020, beating its competitors by a wide margin. Temu’s emergence with a similar strategy in global eCommerce appears to be taking the spotlight away from Shein. This is also true for the criticism directed at the company.

Find Out About Our ECDB Marketplace Ranking

Temu Faces Criticism

Critics point to several detrimental effects of this kind of "ultra-fast" eCommerce: To ensure low prices, manufacturers must keep costs down, contributing to the continued poverty of workers in manufacturing countries. 

The same goes for product quality and environmental friendliness: Cheap products that break easily contribute to increasing amounts of waste, returned products tend to be dumped rather than recycled or resold, and the high number of new products sold is only possible by ripping off SME fashion designers and creators. 

But these are not the only problems with Temu . An investigation by a German public broadcaster conducted product tests with items purchased from Temu, and the results were devastating: Not only were the products made of inferior materials and prone to quick breakage, but one item of clothing ordered by the investigators contained a toxic substance. Specifically, a plasticizer (called dibutyl phthalate) was found at 40 times the level allowed for commercial distribution in the EU and U.S., which can cause liver or kidney damage if used over an extended period. 

Another improper aspect of imports from Temu is that the origin of the products is not declared on the packaging materials. This makes it difficult for consumers who have been harmed by the products to seek accountability and sue responsible manufacturers.

Temu Takes the World by Storm: A New Era of Online Shopping? 

Temu excels with its low-cost products, free shipping, and gamified shopping experience. Its strategies include group buying, referrals, and social media ads. However, its real-time shopping model, akin to Shein's, draws criticism for potential environmental harm and worker exploitation. Independent tests reveal short product lifespans and harmful chemicals exceeding regulations.

Pointing at Phone (blue) Pexels

Despite the criticism, Temu's growth and clear strategy make it a player to watch out for. The emerging business model of ultra-fast eCommerce is undoubtedly gaining competitive advantages over traditional retail approaches.

Sources : Daxueconsulting: 1 2 – DCCEEW – The Guardian – Kake – PULS – SensorTower – ZDNet  

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Temu promises cheap goods. Here's how the shopping app does it

Bill Chappell

business model strategies for

Temu has soared in popularity since it launched in 2022. Here, a photo illustration shows the Temu app in an app store reflected in videos of Temu consumers in Washington, D.C. Stefani Reynolds/AFP via Getty Images hide caption

Temu has soared in popularity since it launched in 2022. Here, a photo illustration shows the Temu app in an app store reflected in videos of Temu consumers in Washington, D.C.

Temu's Super Bowl ads promise to let people "shop like a billionaire" — and they've helped the Chinese-owned online discount marketplace expand in the U.S. at a breathtaking pace.

"In less than a year, this business has spun up an online retailer that is, like, 75% the size of [Target.com], which is enormous," The Atlantic 's Amanda Mull told NPR last fall, citing Temu's $16 billion in revenue in 2022.

But that explosive growth has also fueled skepticism from consumers over the quality of Temu's offerings. And some U.S. officials accuse Temu of underpinning its business with unfair and/or unethical practices.

Here's a quick guide to Temu and the questions about it:

Very low prices are only part of the story

Temu aggressively markets "hot deals" — such as a hooded button-up fleece jacket currently going for $8.32 or a car-mounted vacuum cleaner selling for $13.48 . Eye-catching prices like those are frequently cited in its online ad campaigns.

The reasons behind those low prices range from Temu's business model and aggressive market tactics to an obscure U.S. import law.

For decades, importers and retailers have racked up profits by buying Chinese-made items wholesale, bringing them to the U.S. and selling them at a markup. Temu pursues a similar tactic, but it promises a direct, streamlined link between consumers and manufacturers.

Super Bowl ads played it safe, but there were still some winners

Super Bowl 2024

Super bowl ads played it safe, but there were still some winners.

"Dispatching goods directly from the source eliminates the need for multiple stages of transportation and warehousing," a Temu spokesperson told NPR, "addressing what is often the most significant expense and inefficiency in conventional retail operations."

Temu's strategy follows a model that Pinduoduo, the huge Chinese retailer behind Temu, honed when it streamlined connections between farmers and consumers in China's food and produce sector. In 2022, the U.N. Food and Agriculture Organization said Pinduoduo allowed "more than 16 million farmers to sell their produce to 880 million consumers who shop on the platform."

Temu is aiming at Amazon

Compared with its ultrafast-fashion counterpart Shein , Temu focuses a bit less on clothes and more on ultracheap home goods and plasticware. It's increasingly mentioned as one of the biggest threats to Amazon's e-commerce domination.

For now, Amazon's lead is secure — the company recently reported $170 billion in net quarterly sales, including $70.5 billion from its online stores and $43.5 billion from third-party seller services.

But Temu has quickly made inroads — one metric of the retailer's impact is U.S. mail carriers, including one who recently described to Forbes the phenomenon called being "Temu tired," as she seemingly delivers more of the company's orange-labeled packages each day.

On Apple's list of shopping apps as of Tuesday, Temu held No. 1, followed by Shein and then Shopify and Amazon.

America can't resist fast fashion. Shein, with all its issues, is tailored for it

America can't resist fast fashion. Shein, with all its issues, is tailored for it

Temu has reportedly been undercutting its competitors' prices, absorbing losses to win over customers, according to an analysis by China Merchants Securities that was cited in Chinese-language financial news media and by Wired . Recent reports have also alleged that Temu has pressured sellers to keep prices low.

When asked about those claims, Temu's spokesperson told NPR, "Merchants who have developed economies of scale and demonstrate cost efficiency thrive in Temu's environment. Their ability to offer competitive prices, driven by reduced production and operational costs, are rewarded by consumers looking for that combination of price and quality."

An obscure U.S. law helped Temu's meteoric rise

E-commerce innovations alone don't explain Temu's low prices. Lawmakers also accuse Temu of abusing a loophole in U.S. import tax law. The loophole lets companies skip import fees for smaller-value shipments, and Temu uses that rule when shipping individual packages to people's homes rather than importing in bulk to a warehouse.

The rule in question is called de minimis , a legal term for something too insignificant in value to bother imposing duties. The threshold differs around the world ; in the European Union, it's 150 euros (about $160). The U.S. level used to be $200, but it rose to $800 in 2016 — among the highest in the world — when then-President Barack Obama signed the bipartisan Trade Facilitation and Trade Enforcement Act .

Are the products in your shopping cart real?

The Indicator from Planet Money

Are the products in your shopping cart real.

"Both Temu and Shein rely heavily on the de minimis exception to ship packages directly to U.S. consumers," a congressional review found last year, "allowing them to provide less robust data" to Customs and Border Protection and avoid import duties.

"Temu and Shein alone are likely responsible for more than 30% of all packages shipped to the United States daily under the de minimis provision," the committee said in its report.

The import method also minimizes the chances that Temu's packages will be screened for compliance with the Uyghur Forced Labor Prevention Act, the House Select Committee on the Chinese Communist Party said. That law blocks products from China's Xinjiang region , where systematic human rights abuses against the Uyghur minority have been reported.

"Regarding the compliance issue of products related to forced labor, we attach great importance to it," the Temu representative told NPR. "Our current standards and practices are no different from those of major U.S. e-commerce platforms. The allegations in this regard are completely ungrounded."

Timing and inflation have boosted Temu

Temu exploded in popularity in the U.S. after its first Super Bowl ad in 2023, becoming one of the most downloaded apps in the United States.

The bold decision to tout its months-old marketplace and app with high-profile TV ads came as the company sought a foothold in the U.S. market. Almost immediately, downloads and use of Temu's app spiked, according to Momentum Works , a Singapore-based market research firm.

That first Super Bowl ad placement, which the company repeated in 2024, came as Americans were reeling from record levels of inflation . In that context, Temu's promise of selling everyday items at remarkably low prices resonated.

But there has been backlash, including a federal class action lawsuit filed last year accusing Temu and its parent company of collecting "user data beyond what is necessary for an online shopping app, including biometric information and data from users of the app."

Are Temu products legit?

"On average, some of them are going to be exactly the same, some of them are going to be coming from exactly the same sellers" that consumers might find at other retailers, The Atlantic 's Mull said last year. "Others are going to be a little bit junkier. Others might use substandard materials that might not always pass muster in the U.S. for safety standards."

Also worth noting: Pinduoduo's app and website — but not Temu itself — has for several years been on the U.S. list of "Notorious Markets for Counterfeiting and Piracy," recently updated by the Office of the United States Trade Representative.

The USTR listing says that despite Pinduoduo's claims of adopting new anti-counterfeiting initiatives, a litany of issues remains, including refusals to remove bogus products and "a further deterioration of Pinduoduo's already ineffective seller vetting."

Online pricing algorithms are gaming the system, and could mean you pay more

Online pricing algorithms are gaming the system, and could mean you pay more

Last year, Pinduoduo changed its corporate name to PDD Holdings Inc., which is now the parent company of both Pinduoduo and Temu. Shares of PDD Holdings are listed on the Nasdaq exchange; at the end of stock trading last week, PDD Holdings closed at $127.48 , giving it a market capitalization of $169.37 billion.

As for the U.S.-based Temu, the company is not accredited by the Better Business Bureau, which gives it a rating of C-plus . For comparison, Amazon, which is accredited, has a B rating. To earn accreditation, a business must both meet BBB standards and pay an annual fee.

Alina Selyukh contributed additional reporting.

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