• Magretta 2002 (†655)

    Magretta, Joan, "Why Business Models Matter" Harvard Business Review 80:5 (May 2002), p.86-92.

Existing Citations

  • business model (p.87): The word “model” conjures up images of white boards covered with arcane mathematical formulas. Business models, though, are anything but arcane. They are, at heart, stories–stories that explain how enterprises work. A good business model answers Peter Drucker’s age-old questions: Who is the customer? And what does the customer value? It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost? (†1495)
  • business model (p.89): The term 'business model' first came into widespread use with the advent of the personal computer and the spreadsheet. Before the spreadsheet, business planning usually meant producing a single, base-case forecast. At best, you did a little sensitivity analysis around the projection. The spreadsheet ushered in a much more analytic approach to planning because every major line item could be pulled apart, its components and sub-components analyzed and tested. . . . This was something new. Before the personal computer changed the nature of business planning, most successful business models, like Fargo’s, were created more by accident than by design and forethought. The business model became clear only after the fact. By enabling companies to tie their marketplace insights much more tightly to the resulting economics–to link their assumptions about how people would behave to the numbers of a pro forma P&L – spreadsheets made it possible to model businesses before they were launched. Of course, a spreadsheet is only as good as the assumptions that go into it. (†1496)
  • business model (p.90): Business modeling is, in this sense, the managerial equivalent of the scientific method–you start with a hypothesis, which you then test in action and revise when necessary. (†1497)
  • business model (p.90): The irony about the slipshod use of the concept of business models is that when used correctly, it actually forces managers to think rigorously about their businesses. A business model’s great strength as a planning tool is that it focuses attention on how all the elements of the system fit into a working whole. It’s no surprise that, even during the Internet boom, executives who grasped the basics of business model thinking were in a better position to lead the winners. Meg Whitman, for example, joined eBay in its early days because she was struck by what she described as “the emotional connection between eBay users and the site.” The way people behaved was an early indicator of the potential power of the eBay brand. Whitman also realized that eBay, unlike many Internet businesses that were being created, simply “couldn’t be done off-line.” In other words, Whitman–a seasoned executive–saw a compelling, coherent narrative with the potential to be translated into a profitable business. (†1498)