A business model is a strategic plan for how a company will earn money. The model describes the way in which a company will take its product, offer it to the market and boost sales. A business model determines what products make sense to sell, how a company wants to promote them, what type of people it should try to serve, and what sources of income it can expect. You can use limited rationality when you don't have enough time or information to follow the entire rational decision-making model.
Sometimes it's better to make a good enough decision as soon as possible than to consume much less mental energy and other resources. Successful companies have business models that allow them to meet customer needs at a competitive price and at a sustainable cost. Comparing the gross profit of a company with that of its main competitor or its sector sheds light on the efficiency and effectiveness of its business model. A business strategy allows business owners to make decisions related to manufacturing, operations, and finance.
Herb Kelleher, co-founder and former CEO of Southwest, understood the value equation for the customer from the beginning, as highlighted in an interview with Strategy + Business, after being recognized as a “lifetime strategist”. It lists the various possible situations in which a company is likely to find itself and specifies the set of actions it must take in each of the situations to achieve its objectives in the market. Infrastructure strategy and decisions are difficult, given the typical large investments, sometimes with lengthy and complex implementations, in the context of a constantly changing future. Phil Rosenzweig is professor of strategy and international business at the International Institute for Management Development (IMD) in Lausanne (Switzerland).
However, if a company expands to new target markets, customers and geographical areas before the value proposition and organization are ready, it can fragment the approach, lead to poor execution and lead to financial difficulties. For years, major airlines, such as American Airlines, Delta and Continental, developed their businesses around a structure of hubs and radios, in which all flights passed through a handful of major airports. Joan Magretta, former editor of Harvard Business Review, suggests that there are two critical factors when it comes to sizing business models. A business model is essentially a model of how the company will add value and generate money in the existing market environment.
From a strategic perspective, the better the upper part of the business model is defined, the easier it will be to define the right organizational and functional strategies. The ability to collect and insert objective feedback into a model, update it, and make a better decision the next time simply doesn't exist. Models can estimate whether a loan will be repaid, but in reality they won't change the likelihood that payments will arrive on time, give borrowers greater ability to repay, or ensure that they don't waste their money before the payment is due. It provides a detailed description of all relevant business processes and describes how the company will interact with other market participants.
The model doesn't directly influence borrower behavior; it can't control spending habits or ensure that no one saves enough money each month to repay a loan.