In its simplest form, a business model is how an organisation makes money.
All businesses need a business model to ensure their organisation is viable, and that all the elements that form a profitable business are in place and working cohesively together to make a profit.
A business model also needs to be flexible, to ensure that an organisation can respond to changes in the market and keep making money.
This need for organisational flexibility has been tested to the maximum over the past year, with COVID-19 disrupting the operations of almost every business worldwide. According to research by McKinsey, companies responded to a range of COVID-19 related changes much more quickly than they ever thought possible before the crisis.
Most of these coronavirus-induced changes have involved increased digitization. In fact, more than half of businesses are now investing in technology for competitive advantage or refocusing their entire business around digital technologies.
A blueprint for business
In order to understand the changes that businesses have made in response to the pandemic, let’s first look at what a business model is and how it is used.
“A business model is a set of interdependent elements that model how an organisation creates, delivers and captures value, encompassing activities that transcend the focal organisation's boundaries” explains Dr Sergio Costa, lecturer from the Entrepreneurship Management and Innovation online MSc at the University of Bath, during a webinar he gave on the subject.
Business models allow us to envisage and plan how a business will work, as well as being a ‘living document’ that adapts with market changes and business growth.
“A business model is a great planning and testing tool, enabling you to think of the future without sinking too many resources into it” says Dr Costa. “It also enables you to explain the concept to others and gain their feedback. It is much easier to make changes on paper than it is to a live business.”
According to prominent business theorist Alexander Osterwalder, business models can also be used for ‘understanding, sharing, analysing, managing, simulating and patenting the business logic of a firm’.
“A traditional business model canvas has nine elements, which can be split into three sections” explains Dr Costa. “Firstly, there are elements relating to money, so the revenue streams and cost structure – essentially money in and money out. Next, we have those that relate to supply, so our key resources, suppliers and activities. Lastly, we have the elements of the business model that relate to demand – so your customers. This section includes things such as your value proposition, customer segments, channels and customer relationships. All of these must work together as a whole.”
How have businesses responded to COVID-19?
During the pandemic, consumers have rapidly moved toward online channels, and companies and industries have responded. Research indicates that COVID-19 has caused companies to accelerate the digitization of their supply chain, customer interactions and internal operations by between three and four years. The share of products and services in company portfolios that can be accessed or bought online has reportedly accelerated by an incredible seven years.
A fifth of micro-businesses set up an online presence for the first time during lockdown and more than half of businesses who already had a website bolstered it with additional content, social media posting or by adding an online store.
“Organisations are delivering the same value proposition with a more digital flavour” says Dr Costa. “The COVID-19 crisis has required organisations to look for digital replacements of their products and services and identify ways of delivering them with minimal physical contact and increased safety”.
So how can businesses amend their business models to achieve this transition?
“Firms need to be innovative in redesigning their existing products, rethink their product delivery channels and mechanisms and look for strategic positions and partners that can help them achieve their plans” advises Dr Costa.
Dr Costa also shares an example of an online clothes retailer who increased their digital marketing activity during the pandemic, whilst closing their physical store.
This particular business responded to the pandemic by changing their business model from being predominantly retail led, to completely online. They closed their physical store and increased their spend on digital marketing, utilising social media, Amazon and their own website. As a result, online sales dramatically increased, leading to just a 7% overall drop in sales, despite the pandemic. This move was a rapid turnaround for the business, as their original plans for 2020 were to improve the physical store, whereas in the end they had to go in a completely different direction.
Amending – and in some cases completely overhauling – their business model has been the key to survival for many businesses during the pandemic.
“This crisis...has proven that for businesses to survive, they must allow for variability– they must incorporate a level of flexibility and slack to how they operate, and work with their people in order to navigate challenging times” reports entrepreneur and business director Hanna VanKuiken.
So, will the pandemic lead to a permanent shift toward online business models?
“The pandemic is rapidly changing our behaviour toward online channels, and the shifts are likely to stick post-pandemic” reports Deloitte. “While many companies are challenged to survive in the short-term, the crisis also presents opportunity; bold companies that invest ambitiously and timely in their online business are likely to emerge as market leaders.” Dr Costa agrees. “I don’t think we will go back to exactly where we were before. We are moving to more online services and products and the longer the crisis goes on the more prominent those changes become.”
Understanding the role of business models and how they can adapt is a key part of entrepreneurial strategy and business success. They can help you ensure you are planning a viable business with all the key elements, whilst also giving you the opportunity to plan and test out potential business models before committing to a final strategy. They can also give you the core framework you need to make bold and innovative business decisions.
If you are looking to develop your inner entrepreneur, the Entrepreneurship Management and Innovation online MSc at the University of Bath helps students to develop the practical business skills and pioneering mindset you need to succeed. For more information, please complete the form below and a member of our team will be in contact.