Recently, a reader of my August column “A Field in Flux” asked me for more details about business models relevant to the retirement income opportunity. As I was thinking about his question, I noticed that a couple of robins had built a nest near my office window.
About a month later three baby robins appeared. A few weeks later they looked like their parents and then they were gone. This made me curious about robins in general — they belong to the thrush family — and their survival rate in particular.
The news was as expected: Robins reproduce at a rapid rate — two broods of four babies per year on average. They also fail at such a rapid rate that they are often used as an example of population dynamics. Failure is pervasive in real life.
This is also a key feature of business models. Most implementations of a specific business model fail. What goes for robins goes for business. Interestingly, the average venture capitalist’s portfolio companies seem to fare just as badly as robins do with a 90 percent failure rate.
The field of formal study on business models is not very crowded. For starters the term “business model” does not have a settled definition. Much of the available research focuses on value-chain analyses. However, a 2005 Working Paper from MIT’s Sloan School of Management — “Do Some Business Models Perform Better than Others? A Study of the 1,000 Largest U.S. Firms,” by Peter Weill and others — breaks new ground.
This paper presents a new typology of business models. This typology is more actionable from a practitioner point of view than the value-chain versions.
The typology is based on finding answers to the question: what does your business do in order to make money? The paper organizes the answers across two dimensions: the types of assets involved (physical, financial, intangible and human) and the types of rights being sold (the right of ownership of an asset, the right of use of an asset, the right to match an asset with potential buyers or sellers).
These rights create four basic business model archetypes — creator, distributor, landlord, broker — that can be arrayed across types of assets to define business models. Fortunately, we do not need to review all the business models. We can limit ourselves to the four archetypes as they apply to financial asset types.
Examples of financial creators include serial entrepreneurs who start and sell other companies. This is the case in this typology because creators significantly transform or design the financial assets that they sell.
Financial distributors include traders who buy and sell financial assets without significantly transforming them. Banks and other financial firms that invest for their own account are included in this business model.
Financial landlords let others use cash or other financial assets under specific and limited conditions. Examples include lenders and insurers. Lenders provide cash that borrowers can use for a limited time in return for a rate of interest. In return for a premium, insurers provide access to their financial reserves if the client experiences well-defined losses.
Finally, a financial broker matches buyers and sellers of financial assets.