# 08 Oct 2006, 02:20AM: A Public Service Announcement:
From Henry Chesbrough's Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press, 2006):
The term business model is often used, but not often clearly defined. My colleague Richard Rosenbloom and I have developed a specific and useful working definition.
The functions of a business model are as follows:
- To articulate the value proposition, that is, the value created for users by the offering based on the technology
- To identify a market segment, that is, the users to whom the technology is useful and the purpose for which it will be used
- To define the structure of the firm's value chain, which is required to create and distribute the offering, and to determine the complementary assets needed to support the firm's position in this chain
- To specify the revenue generation mechanism(s) for the firm, and estimate the cost structure and target margins of producing the offering, given the value proposition and value chain structure chosen
- To describe the position of the firm within the value network linking suppliers and customers, including identification of potential complementary firms and competitors
- To formulate the competitive strategy by which the innovating firm will gain and hold advantage over rivals
When I've seen the derogatory "What's your business model?" question, it's been in regard to #4, revenue generation. They all look important. #5 looks the least fun.
Business models are important!
