Blog by Sumana Harihareswara, Changeset founder

08 Oct 2006, 2:20 a.m.

A Public Service Announcement

Hi, reader. I wrote this in 2006 and it's now more than five years old. So it may be very out of date; the world, and I, have changed a lot since I wrote it! I'm keeping this up for historical archive purposes, but the me of today may 100% disagree with what I said then. I rarely edit posts after publishing them, but if I do, I usually leave a note in italics to mark the edit and the reason. If this post is particularly offensive or breaches someone's privacy, please contact me.

From Henry Chesbrough's Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press, 2006):

The term business model is often used, but not often clearly defined. My colleague Richard Rosenbloom and I have developed a specific and useful working definition.

The functions of a business model are as follows:

  1. To articulate the value proposition, that is, the value created for users by the offering based on the technology

  2. To identify a market segment, that is, the users to whom the technology is useful and the purpose for which it will be used

  3. To define the structure of the firm's value chain, which is required to create and distribute the offering, and to determine the complementary assets needed to support the firm's position in this chain

  4. To specify the revenue generation mechanism(s) for the firm, and estimate the cost structure and target margins of producing the offering, given the value proposition and value chain structure chosen

  5. To describe the position of the firm within the value network linking suppliers and customers, including identification of potential complementary firms and competitors

  6. To formulate the competitive strategy by which the innovating firm will gain and hold advantage over rivals

When I've seen the derogatory "What's your business model?" question, it's been in regard to #4, revenue generation. They all look important. #5 looks the least fun.

Business models are important!