Individuals or organizations must create value for others—through goods or services—in order to earn money.
The nature of that value, and the way it is delivered, defines a business model.
For example, you cannot sell stones found along the seaside to people who are already at the beach, because they can pick them up themselves. However, if those same stones are collected, packaged into 20-kilogram bags, and offered for sale at a greenhouse or a landscaping supply store, that becomes a business model. The value created comes not from the stones themselves but from the service delivered.
Opening a pizzeria is a business model. Opening a lahmacun shop on the street below is a different business model. Although both operate in the same category, their models differ significantly. If the rent of the upper-street shop is twice as high as the lower one, prices must differ accordingly. To sell the same pizza at a higher price in the upper location, the shop must be decorated more luxuriously and attractively. In such cases, whichever location aligns with the socioeconomic structure of its surroundings will perform well; the other may struggle to attract customers. If the surrounding area is demographically mixed, both businesses may find their own customer profiles—or neither may succeed.
Some companies are poorly managed yet continue to make sales and generate profit. They may have weak standards, high employee turnover, overpriced purchases, delayed shipments, unresolved customer complaints, and countless inefficiencies. Yet the company still produces income and remains profitable. In such cases, it becomes clear that the business model itself is working. We can estimate what makes the model successful, but we do not know it precisely. Many other firms that try to replicate the same model—sometimes even earlier or seemingly “better”—fail to achieve similar results.
Different restaurants offering the same type of food may open in the same area. Most fail, but one succeeds and earns significant revenue. When success comes, a story is written retrospectively:
“The quality was better, the prices were fair, the owner was always present…”
If the business later declines, the story is again rewritten backwards:
“They lowered the quality of their meat, became arrogant, increased their prices…”
A striking example comes from the technology sector. When Apple was on the verge of collapse, Steve Jobs returned and created the iPhone. Then came the iPod and iPad, transforming the company back into a global titan. Shortly before that period, the mobile communication market was dominated by seemingly unshakeable giants such as Ericsson and Nokia. A small, unknown Canadian company named RIM (BlackBerry) surged like a tsunami and disrupted the entire industry. Less than ten years later, Google capitalized on Microsoft’s sluggishness and developed the Android operating system. Once the software landscape changed, Korean manufacturers like Samsung and HTC entered the market and broke the monopoly of existing producers. Many people may not drive South Korean cars, but a significant portion now uses South Korean mobile phones.
Business models can rapidly elevate a company—or collapse suddenly.
The story of Kodak is highly instructive. Founded in 1888 by George Eastman, Eastman Kodak Company made it possible for ordinary people to own cameras and became the global leader in photography. Kodak at one point controlled nearly 90% of the photographic film market. The company is said to have developed the first digital camera in 1976 but shelved the idea out of fear that it would undermine its analog business.
In 1996, Kodak ranked as the fourth most valuable brand in the world, after Disney, Coca-Cola, and McDonald’s. Twenty years later, Disney’s market value was 70 billion USD, Coca-Cola’s 154 billion USD, McDonald’s 104 billion USD, while Kodak—bankrupt—had dropped below 200 million USD.
As digital photography became widespread, Kodak stopped selling film, closed 13 production facilities and 130 laboratories, and laid off 47,000 employees within a few years. Because the company failed to develop a new business model in time, it declared bankruptcy in 2012.
Some companies maintain business models whose success is uncertain or deteriorates over time. Others succeed in one field but struggle when trying to replicate that success in another. The flagship business ends up continuously subsidizing others.
No matter how effectively or skillfully you manage a business whose model does not work, sales and profitability will not reach the desired level. Competitors take the business while you watch. In such firms, sales teams burn out quickly, decisions constantly change, yet results remain disappointing.
That article comes from the experiments we have conducted over the years.
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