A firm exists to supply a product or service to needful customers. Entrepreneurs and mature firms alike are always seeking to identify underserved or unmet needs, against which they can create and deliver a product or service. This is the essence of innovation.
However, innovation alone is not enough. It must be profitable innovation. Firms must be sure that they can make money from supplying a product or service to needful customers. A business model describes the logic of how a firm will make money from serving needful customers with a product or service offering.
A business model takes us beyond the primitive logic of “build it and they will come.” A business model forces the tight reasoning and cause-and-effect logic that minimizes the risk that business ventures will either fail or be unprofitable. With respect to new product development, the business model is a key part of the rationale that justifies allocating scarce and valuable resources to development activities.
Creating and delivering value for customers through offerings is not enough. Firms must know how they will capture their portion of the value provided to the marketplace. This is the source of the firm’s profit.
Unless a firm can describe how it will create, deliver, and capture economic value, it has no business model. Constructing viable business models is a key element of a firm’s competitive strategy. If the key step of business modeling is omitted, a firm’s competitive strategy is incomplete and fraught with risk.