Business Model:

A definition of Business Model would be:- “ the descriptions of the operations of a business including the components of the business, the functions of the business, and the revenues and expenses that the business generates”.

The environment in which a company operates, the competitors of a product require persons who understand their task in its entirety, but very few can do this.  Technical experts know their job, and the business experts know theirs.  A good Business Model serves to connect these two domains as shown by Henry Chesbrough and Richard S. Rosenbloom in their paper.  The role of Business Model is capturing value from innovation.

   Technical Inputs       <  >      Business Model     <  >      Economic Output

A Business Model draws on a variety of subjects like economics, entrepreneurship, finance, marketing operations and strategy.  The Business Model is a very important determinant of the profits to be made from an innovation.  A poor innovation with a great business model may be more profitable than a great innovation with a mediocre business model.

Chesborough and Rosenbloom have arrived at the following factors for a good Business Model:-

Value Propostion:  A description of customer problem, the product that addresses the problem and the value of the product from customer`s perspective.

Market Segment: Customers to be targeted, recognizing different market segments have different market needs.  Sometimes, the potential of an innovation is unlocked only a when a different market segment is targeted.

Value Chain Structure: The company`s position and activities in the value chain and how the company will capture part of the value that it creates in the chain.

Revenue Generation and Margins:  How revenue is generated (sales, leasing, subscriptions, support, etc.) the cost structure, and target profit margins.

Position in Value Network:  Identification of competitors, complementors and any network effect that can be utilized to deliver more value to the customer.

Competitive Strategy:  How  the company will attempt to develop a sustainable competitive advantage, for example, by means of a cost differentiation or niche strategy.

New technologies require new Business Models.  A start-up company with new Business Model will have an advantage over more established companies.  In the technological and economic domain, an unproven Business Model adds additional risk, and entrepreneurial ventures invariably are more prepared to accept this risk than would be a large well entrenched firm.

In fact, venture capitalists invest more in a Business Model.  Often, the venture capitalists push for a change in Business Model when it is apparent that the original model is not working.

Hence a good effective Business Model is vital for an organizational success.