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Why Business Models Matter

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Business model” was one of the great buzzwords of the Internet boom, routinely invoked, as the writer Michael Lewis put it, “to glorify all manner of half-baked plans.” A company didn’t need a strategy, or a special competence, or even any customers—all it needed was a Web-based business model that promised wild profits in some distant, ill-defined future. Many people—investors, entrepreneurs, and executives alike—bought the fantasy and got burned. And as the inevitable counterreaction played out, the concept of the business model fell out of fashion nearly as quickly as the .com appendage itself.

That’s a shame. For while it’s true that a lot of capital was raised to fund flawed business models, the fault lies not with the concept of the business model but with its distortion and misuse. A good business model remains essential to every successful organization, whether it’s a new venture or an established player. But before managers can apply the concept, they need a simple working definition that clears up the fuzziness associated with the term.

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