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The Universal Discipline
Firms can be seen as systems that create
value for a multitude of constituencies. To understand and
manage these systems, they must use business models.
Magretta describes a business model as "a set of assumptions
about how an organization will perform by creating value for
all the players on which it depends, not just its
customers." A good business model is a story of how a
business works.
Take the example of American Express, a company with one of
the most successful business models of all time. Its story
began in 1892, when J. C. Fargo, the president of what was
then a regional freight express business, took a trip to
Europe, where he found it immensely difficult to encash his
letters of credit into local currency. |
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This led to the invention of the traveler’s check, where for a small fee,
travelers could buy a solution to this problem. American Express had found a
riskless business, where customers paid up front for their checks. They also
found something more, which they had not anticipated - float. Since
customers paid for the checks before they used them, American Express was
getting the equivalent of an interest-free loan from its customers. Thus
they could make money on selling the checks, make some more from the float,
and finally some more from the checks that customers never encashed. They
had found a brilliant business model - a model that has been a success for
over a hundred years.
Business models are easy to recognize - after an organization has succeeded
or failed. Before the fact, the success or failure of a model can be
assessed only on the basis of assumptions about the behavior of people and
organizations in markets. Essentially, every model is based on a set of
hypotheses about how the world works. The world here is a world of markets
on which the organization depends on for its success - markets for talent,
capital, supplies and products or services.
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