Why Business Models Matterby Joan MagrettaJoan MagrettaA good business model begins with an insight into human motivations and ends in a rich stream of profits. Telling a Good StoryA good Business model answers age-old questionsWho is the customer? What does customer value?To managers: How do we make money in this business?The underlying economic logic how we can deliver value to customers at an appropriate cost?Most Successful Business Model- American expressJ.C. Fargo had a hard time in translating his LOC to cash.If the president has that sort of trouble, think about ordinary traveller!Creation of American Express travellers check- Insured, Convenience.AmEx discovered a riskless business model.

American Express Travellers checkCritical TestsBusiness models dont work as they fail two critical tests.Narrative test (The story doesnt make sense) and the numbers test (the P&L does;t add up).Business modeling is the managerial equivalent of the scientific method.What about Strategy?A business model isnt the same thing as a strategy.Business model: How the pieces of business fit together.One critical dimension not factored in: CompetitionDistinction between a Business model and a strategy: Wal-Mart.Wal-Marts Key strategy was to put good-sized stores into little one-horse towns which everybody else was ignoring.Wal-Mart promised national brands at everyday low prices.

A good model is not enoughWhen a new model changes the economics of an industry and is difficult to replicate, it can itself create a strong competitive advantage- Dells direct selling.

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