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In the article ‘why Business matters’, Joan Magretta gives an insight into the origin of a good business model. She gives a highlight on the application of the term ‘business model’ in relation to a business strategy. The article indicates the differences between business strategies and business models.
The author indicates that the interchangeable use of business models with business strategies has rendered the use of the terms meaningless. The author therefore enlightens the audience on the significance of a business model. She further gives an account of what causes a business model to succeed or fail. Also, the author illustrates with relevant examples, ways in which business models are complemented by an appropriate strategy.
Differences between a Business Strategy and a Business Model
The author refers to a business model as a story. In this case, a business model gives a description of the process through which a company generates, delivers, and puts up for sale a product or service to make wealth. This means that a business model describes the customers of a given business.
A model further describes how a business organization intends to generate revenue of the business and the same time creating value to the customer. On the other hand, a strategy is a factor that brings difference to the business. A strategy compliments or balances a business model making the business successful. By employing an appropriate business strategy, a business organization is capable of beating the competition through differentiation.
Importance of a Business Model for a Successful Business
Magretta further highlights on the importance of a business model to the success of the business. She claims that a business model is a planning tool. Through the business model, the focus of the business is shifted to ensuring that elements in the structure fit into a functioning in one piece. A business model ought to be realistic and well designed for the business organization to succeed.
Referring to an old-aged question from Peter Drucker, the author claims that a business model seeks to identify the customer in a given business and elaborate on the value of the customer. On the other hand, the strategic analysis explains how the business performs better than its competitors. This means that a good business model gives the management a room to put to test and at the same time revise assumptions made concerning the customer.
In addition, a business model gives the management an ample time to think thoroughly about the business and organize the staff accordingly for the success of the mission of the business. The business model also creates a room for the business organization to change, according to the prevailing market conditions.
Two Critical Tests for the Success of a Business Model
According to Magretta (2), two critical tests highlight the success of a business. The first is a narrative test. In this case, the model should tell a story of the business. It should explain the business’ customers and further describes how business organization intents to generate revenue to the business and at the same time creating value for customers. The narrative created can add value the value chain of the business in two ways.
First, by creating something that gratifies unmet wants and second, by selling a product in an inventive manner. The second critical test that highlights the success of a business is called the number test. In this case, an assumption about the business model becomes meaningful after incorporating economics. This means the profit and loss should be evaluated based on the given model.
A Strategy Complement
A model is not enough for a business organization. The organization ought to be different from its rivals to oust them in a given market segment. In this case, the business should come up with a strategy for its operation. According to the author of this article, two different business organizations can employ a similar model in a given market.
However, a strategy is unique and differentiates the organization from one another. As a result, the author implies that a business organization should incorporate a strategy in its model for it to be unique. A strategy should define how the organization will achieve differentiation and define the means through which the organization will become different.
The author uses Wal-Mart in illustrating the significance of complimenting a strategy into a model. Wal-Mart implemented Kmart’s model in its business. However, Wal-Mart incorporated a unique strategy in its model thereby differentiating its business from Kmart.
Based on the information presented in this article, it is evident the author has tackled the issue of business model in a subtle way. The idea of approaching the subject by comparing a business model and a business strategy is vital for the audience because it brings out the differences between the two.
Instead of tackling obvious issues related to business model, the author approaches the subject in a unique way whereby he delves on commonly confused issues. In addition, the author authenticates the information with real life examples. Based on this information, it is clear that although business models are essential, they ought to go hand-in-hand with a business strategy. Also, a business model matters to any business and thus should never be ignored.
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Magretta, Joan. Why Business Models Matter. Cambridge, Massachusetts: Harvard Business School Press, 2002. Print.