Inside IT
Business Models That Help You Understand Enterprises More Clearly

From Idea to Business Modeling 1

When friends and relatives ask where you work, they are usually asking for the name of the company you work for. When the name of the company is well known, they will congratulate you for getting such a great job, but if it is less known, they are more likely to ask what the company actually does.

Game developers, credit card companies, or shopping malls can be easily introduced as most people know what they do, but it can be tricky to explain what companies like LG CNS does. The name does not give much information about what they do, so saying it is an IT or SI company does not help people understand what their business is involved in specifically.

This is because Business to Business (B2B) companies such as IT service providers are not as easy to grasp as Business to Consumer (B2C) companies. I’ve seen postings on the board for LG CNS staff members about relatives asking them to come over to their houses to fix their computers as they simply don’t understand what they do at LG CNS.

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It is common for people to figure out what a company does solely through the type of industry it is in, rather than by its fundamental business model, or through the name of a company instead of the field it is in. Even though the industry rather than the name of the company, and the business model rather than its industry tells a lot more about a company, not many people try to learn these profound aspects.

But if you are looking to find a new job, a company’s business model will give you the most useful information. This is because all companies designate different jobs and positions according to their business models and look for the right person to perform the task most successfully. In other words, once you understand what business models different companies have, you can also see what kinds of infrastructure they have, what kind of people they are hiring, and how their capital is flowing as well.

All enterprises are there to make money. What’s different here is in what they do to achieve this goal. This means they run different businesses, and these businesses are designed to make profits and keep the company in the market.

A bank, for example, attracts savings from clients and gives loans to companies and individuals in order to create profit through the interest which accrues. Although banks have much more complicated business models these days, the most fundamental one is to gain profit through interest from savings and loans.

In order to find more customers, banks locate their branches where there is a large floating population to enhance accessibility. They also check loan applicants’ credit and collateral thoroughly to make sure they will pay back what they borrow. These are banks’ most important reasoning in structuring their optimal human resources, computing systems, and branch networks.

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Why do we use the term ‘business model’, then, instead of ‘business’? This is because there can be multiple business models within the same business category based on how it’s designed.

For example, a water cooler business can have a conventional sales-based business model, but also a rental-based business model. The sales-based business model requires branches or directly managed shops to form the best sales network, but the rental-based business model needs the best sales people instead.

Another example is in the hotel industry. There can be the traditional hotel chain business model, and then more novel models for intermediary platforms such as AirBnB or Priceline.com.

The idea of a business model is important not only in grasping the characteristics of what a company is doing, but also when starting a new business. This is because the results can differ according to what business model you have followed.

The term itself was created to refer to the novel types of businesses that became possible through the emergence of the internet and improvements in transportation and distribution networks. Conventional industries produce products, supply them through their distribution networks, and sell them. The emergence of the internet and IT, however, made web-based intermediary platforms possible. One of the business models most well-known for their innovative business models is Priceline, an intermediary service for finding and booking accommodations.

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Conventional hotel reservation based business model and the auction style business model from Priceline

The image above shows the difference between conventional hotel reservation-based business models and the model used by Priceline. All travelers want to get great hotel rooms at cheap prices. Yet for most hotels, travelers need to make reservations according to the prices set by the hotel.

Priceline, however, is taking a whole new approach. On their website, customers enter their preferred conditions for the accommodation they’re looking for, such as the length of stay, the number of people, and the price range they are willing to spend. The hotels with empty rooms register their rates to attract clients, and the Priceline intermediary system matches these hotels to the right customers. We call this the “Dutch auction model,” because the hotels, the seller in other words, suggest rates and other conditions. This kind of business model was introduced thanks to the internet and the IT development.

There are many other cases of business model innovation in more conventional areas like the manufacturing and distribution industries. Another example is the water cooler rental business model which led the Korean water cooler company Coway to success. The water cooler market grew as more people became interested in health and lost their trust in tap water. This market however, may not have gotten this big without the change in business model from sales-based to rental-based.

Buying a new water cooler feels like too big an expense for a lot of consumers, so the sales-based business model could not expand the market in a short period of time. Managing the filter and regular cleanings of the interior components are also a bit too much to handle for the consumers themselves. The rental service, however, not only takes care of all these problems, but also requires much less of an initial cost.

Business models change the paradigm of existing industries and change the rules of the game at the same time, so that new companies are able to break down the traditionally strong companies. Nokia, which used to be the strongest in the mobile phone market, was bumped out of that position by Apple, which brought huge changes in business models toward smart phones and software. Blockbuster, the former leader of the video rental market, also gave way to Netflix with their online rental business model.

A business model is not just about making a single business successful, but a crucial strategy that changes the destiny of company’s place in the market. Understanding the business model, for this reason, is very important in grasping what a company is all about as well as changes in the overall industry.

If you are interested in learning more about what a business model is, I would like to recommend a book called Business Model Generation, which gives lots of information about the components of a business model and cases where this concept has been applied in reality. It also demonstrates how to turn an idea into a business model in detail.

In the next posting, we will see how an idea for a product or a service can turn into a business model based on the case of the ‘Talk Order ’ service from LG CNS.

Written by Seok-tae Kang, LG CNS

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