Companies exist to create value and offer it to customers for a price. Indeed, the entire economy can be viewed as a universe made up of value producing, value consuming, and value trading entities. The process of creating and exchanging value in a profitable manner is what a business model is all about. The building blocks of a business model consists of choosing the right customer segment, identifying and meeting their needs more effectively than their competitors. This article attempts to understand what a business model is, what makes it sustainable and what happens when an existing business model is replaced by a new one.

The last five years have been tumultuous for corporations all over the world. Greatly admired companies like Enron have bitten the dust while those like IBM who were close to being written off, staged a splendid recovery. Many glamorous `new economy' outfits have disappeared while `old economy' companies like Wal-Mart continue to post impressive results. Sun Microsystems, arguably one of the most innovative companies in the computer industry is in deep trouble. Software giant Microsoft faces a major challenge from Google, a mere search engine which has attained a stratospheric market capitalization.

As early as 1937, the Nobel Prize-winning economist Ronald Coase contended that the dominant economic entities of his day - the mass market and corporate hierarchywere the consequences of the relatively high transaction and coordination costs involved in creating and exchanging value. These entities were not created overnight. They emerged over time as the society looked for a more efficient way of exchanging value between participating parties. Coase's hypothesis had simple but profound implications. If the cost of exchanging value between discrete entities diminished, the size and shape of economic entities would also change. And so would business models.

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