Traditional Business Model – An Overview

INTRODUCTION

Businesses exist to make a profit by effectively utilising their resources, targeting their customers and proposing a value offering. The structure of these businesses differs, and it defines how they compete within their markets, and ensure sustainability. The manner in which a business operates is usually considered as its business model, however, according to Magretta (2002), this could meaning several things to several people. Linder and Cantrell (2000) argue that when people talk about business model, they are referring to components of business models, operating business models and change models. However, the most prominent factor, which is the operating business models, is the “real thing”, as it defines the “organisation’s core logic for creating value”.

Accordingly Linder and Cantrell assert that the “operating model of a profit oriented business explains how it makes money”, and since most organisations operating in free markets are in constant competition for resources and customers, an effective business model highlights how well a company is distinctive in its path and approach towards success, which is invariably in attracting employees, investors and customers – and to profitably deliver its products and / or services. In coherence to this, Timmers (1998) also defines a business model as “an architecture for product, service and information flows, including a description of the various business actors and their roles; and a description of the potential benefits for the various business actors; and a description of the sources of revenue”.

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Essentially, business models are stories of how businesses work, and they answer core questions on who the customers are, what the customers value, and how the business makes a profit (Magretta, 2002). This differs across most companies, and defines the competitive advantage of several competitors. Traditional business models are diverse, and have ideally evolved over the years, especially with the advent of technology and the Internet. As a result, companies constantly adapt their models to suit the industry within which they operate, the customers they seek to target, and the value they want to create. In the words of Miller et al (2009), traditional business models define how a company makes profits. In contrast to this, a new wave of companies seem to adopt a new model, equally focused on making profit, but not to be distributed as shareholder dividends, but to be used in accomplishing a social objective, and these are called social business models.

This essay would seek to analyse both business models (traditional and social), in a bid to ascertain their similarities and differences, and determine if social business models are different from traditional business models. The analysis would be achieved by drawing on relevant academic theories, books, and industry cases.

Traditional And Social Business Models

Traditional business models comprise several ways of doing business, in which the process involves creating customer value, and the end result is profit maximization. Several examples of traditional business models exist, such as the razor and blade model used by HP Printers, bidding platform model used by eBay, customised product delivery used by Dell Computers, and Product Innovation and Brand Leadership utilised by Apple. These all represent different variations of the traditional business model, in which businesses deliver what customers want, in a manner in which it increases their profitability. According to Linder and Cantrell (2000), the main driver of business model innovation is competition and changing business climates, citing a case of companies that operated decades ago that have now lost market share due to their inability to adapt their business models appropriately.

In contrast to the traditional business model, in which the main goal is ultimate profit and dividend for shareholders, the social model seeks to adopt a similar, yet different approach. The concept of the social business was created by Muhammad Yunus, a Nobel peace laureate, who described it as a “non loss, non dividend” business, that did not provide dividends for the shareholders, but was created to serve a social purpose, whilst still making a profit. The profit would ideally serve to expand the operations of the social business, and also repay back shareholders for their initial investment (Yunus and Weber, 2010). According to Yunus and Weber, the “social business is a new kind of business [that is] quite distinct from the traditional profit-maximizing business or a not for profit organisation… and its goal is to solve a social problem by using business methods, including the creation and sale of products and services”.

In line with this statement, Yunus and Weber (2010), propose that a social business model adopts the basic principle of the traditional business model, in that it should operate using business methods, adopt in business practices and make a profit. Accordingly, there are two sorts of social business models. The first is a “non-loss, non-dividend company” that is centred upon addressing a social issue, and is owned by investors whose profits are invested with the aim of improving the business. The second is business owned by the poor people, and also serves a cause. The main ideology in this definition is that a social model entails the creation of value for customers, where the eventual aim is not profit maximization, but accomplishing a social cause.

Social Business Critique

However, based on findings from literature and a review of industry cases, this essay would argue that the social business model is only an alternative to the traditional business model, and the reasons are as follows:

Firstly, the operating business model (Linder and Cantrell, 2000), which this essay basis the definition of the traditional business model on, is the organisation’s core logic for creating value, and based on that definition, the traditional business model centres on attracting customers, employees and investors, and delivering products and services profitably – all of which are features of the “social business model”. For instance, Yunus and Weber discussed the Grameen Bank operating on a social business model. However, the basic bank model is intermediation, wherein they accept savings and give out loans. This is a traditional model that has been operational in most global banks for over a century.

Secondly, social business models emphasize their contribution to a social context or issue, and being owned by the “poor”. The former is a practice commonly regarded as corporate social responsibility, and is conducted by a large number of organisations, with some large corporations such as Google offering a percentage of their profits yearly for CSR functions. Also being owned by the “poor” does not seem logical, as the business would need start up funds in order to grow and be sustainable, and for this to happen, the owners would have had to invest capital into the business – thus making them investors within a business.

Lastly, Richards (2008) notes that social responsibility does not necessarily depict social entrepreneurship or enterprise. Organisations that make profit can adopt different approaches to re-investing their profits, and organisations can also adopt different marketing strategies. By positioning themselves as a social business, they appeal more to a particular segment of the population, which may the poor people, and also get to attract investors who are interested in this cause, and employees who are willing to work for less due to the mission of the company.

Since the main aim of a traditional business model is to create profits by effectively harnessing customers, employees and investors, it seems this is also true in the social business model. Customers, investors and employees are attracted to the company because of its cause. Since the main aim of establishing a business model is to stand out and compete effectively, then these firms have stood out. They have adopted a different approach and strategy to maintaining sustainability, whilst still providing for the poor. In that sense, the “social business” may be just another business model that has adopted a social marketing strategy, which is centred upon targeting poor people, and attracting the right sorts of investors and employees to cater for them.

Furthermore, there seems to be a number of issues immediately apparent in the execution of the social business model. Firstly, Richards (2008) noted that Yunus’ definition and specifications of the term and model was quite narrow, referring to the instructions that investors should not expect dividends from the investments, and only seek to recoup their investments. Investors seeking to invest in other investments would always want to make a profit on their investments, while non for profits that could have contributed may not assist to their full potential due to profit orientation of the social business.

Richards (2008) also notes that by being a business intending to make profit, the social business is also subjected to the competitive and industry pressures it would ideally experience in any other market, and as a result there is a risk for investors seeking to invest in the business. For instance, Mair and Schoen (2007) explained that any investor in the social business market would ideally prefer to invest in a number of businesses and not just one, based on the fact that all may not succeed. Therefore, if an investor put money into 3 social businesses, and one failed, while the other merely broke even, the investor would expect his returns from the successful social business to compensate for the risks inherent in the venture.

Mair and Schoen (2007) note the cases of several microfinance banks the world over that are headed by trusts, but cater to the poor by offering them pay day loans. However, these cannot be considered as social businesses, because their main aim is to make profits, even though they are offering a social service by targeting the poor. Richards (2008) also argued that such businesses that target the poor in the name of being social service companies are most times exploitative and only service their personal interest. In as much as the social business model does hold very strong potential for those in need of its services, I personally believe that it is a traditional business model that has adopted a social marketing strategy in a bid to attract investors, employees and customers. It also has a substantial corporate social responsibility strategy, especially in how it re-invests its capital and grows bigger, in order to continue providing its services and making profits. However, underneath it all, it is still a business model that proposes the sales of goods and services to customers for a profit – a traditional business.

CONCLUSION

This essay has established traditional business models as those that are centred on delivering customer value and maximising profitability, and discussed whether or not social business models can be considered as being different from traditional models. Due to the emphasis on delivering customer value and maximising profitability, this essay concludes that social business models are only an addition to the long list of business models. They are considered so because they fulfil the core aspects of the traditional model, their social agenda can be interpreted in the sense that the organisational strategy is to attract social investors and employees, and specifically target a segment of the market that would require their services.

REFERENCES

Hamel, G. (2000) Leading the Revolution, Harvard Business School Press, Boston.

Hedman, J., and Kalling, T. (2001) The business model: a means to understand the business context of information and communication technology, School of Eocnomics and Management, Lund University, 44pp

Linder, J.C. and Cantrell, S. (2000) Changing Business Models: Surveying the Landscape, Institute for Strategic Change, Accenture.

Magretta, J (2002) Why business models matter, Harvard business review

Mair, J., and Schoen, O. (2007) Successful social entrepreneurial business models in the context of developing economies: An explorative study, International Journal of Emerging Markets, Vol. 2 (1)

Miller, F. P., Vandome, A. F., and McBrewster, J. (2009) Business Model, VDM Publishing House Ltd, 80pp

Richards, D. (2008) Social business model, Defeat Poverty, http://www.defeatpoverty.com/2008/02/social-business-model.html, [accessed: 24/04/2010]

Timmers, P. (1998) Business Models for Electronic Markets, Journal on Electronic Markets, 8(2), p. 3-8. Weill, P., Vitale, M.R. (2001) Place to Space: Migrating to eBusiness Models, Harvard Business School Press, Boston.

Yunus, M., and Weber, K. (2010) Building Social Business: The New Kind of Capitalism That Serves Humanity’s Most Pressing Needs, PublicAffairs, 226pp

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