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What Is a Good Business Model?

Apr 27, 2008
A good business model provides benefits to all of its stakeholders more effectively than existing competitors or new entrants can. Here are six common ways to provide a greater array and volume of stakeholder benefits:

1. Help your customers add customers for themselves faster than their competitors.

2. Stimulate industry growth through providing more benefits and fewer drawbacks at the current price level.

3. Reprice your offerings to encourage using more of them.

4. Reduce the resources needed to provide and use these offerings.

5. Reinvent the resources generated by your business model to provide even more benefits and fewer drawbacks in the future, faster than your competitors can.

6. Fairly share excess resources with the stakeholders who have supported and provided the business models success in a predictable way, so that no other organization can offer these stakeholders as much benefit now or in the future.

By this definition, many businesses have good business models. You can look at Disney's theme parks, Southwest Airlines, Johnson & Johnson's over-the-counter health-care products, and IBM's outsourced computer services as examples.

To better appreciate what a good business model is, now let's look at some bad business model characteristics.

The worst element of a bad business model is that scarce resources are rapidly drained from the company, harming both current and future performance. Such scarce resources include the time and attention of key employees, time to reach the market with new offerings, stakeholder goodwill, and cash.

A bad business model will usually favor some stakeholders at the obvious expense of the rest, causing cooperation to decline. The CEOs of bankrupt telecommunications companies were such a favored group at those companies that were otherwise unsuccessful in serving stakeholders.

Kmart has been an example. The company's discount retailing business model directed its stores against Wal-Mart, but was handicapped by higher costs and prices and a voracious hunger for borrowing to increase store size and improve attractiveness.

Few of its investments helped employees, who experienced low and declining morale. Suppliers saw their sales sag and often had to wait for payment. Shareholders saw their holdings erode to nothing. Eventually, Kmart entered bankruptcy in 2001. After enormous investments and efforts, there was little to show for any stakeholder beyond customers.

Ultimately a bad business model cannot be sustained. A company with a bad business model finds itself wasting time and resources in a blind alley from which it must eventually retreat in a much diminished condition.
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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