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Greg McKee, NDSU Agribusiness and Applied Economics Department, Published July 20 2012

Spotlight on Economics: Why business models matter

When a business operates, it must answer at least three questions. First, how should it obtain the capital it needs to purchase and develop assets? Second, who will control the business and make policies to direct its overall course? Third, what should be done with the income or losses that will come?

A business model is a particular combination of methods by which these questions are answered, while business principles are guidelines for how a business should answer these questions.

One prominent set of business principles is the cooperative business principles.

These feature a unique relationship between the users or customers and the business. Among these principles are:

* user ownership

* user control

* user income

* concern for community

* education

These principles suggest that the customer or user of the business plays one of three roles in answering the three business questions. These roles are customer, investor and decision maker.

There are many North Dakota-based corporations that operate using these principles. These firms are found in industries such as:

* agriculture

* energy

* finance

* telecommunications

* food retail

* lodging

* household goods

In 2011, 256 North Dakota cooperative businesses in these industries contributed $5.6 billion to the state's economy and generated 25,000 full-time jobs in the state.

The success or failure of any particular cooperative or other type of corporation cannot be attributed to applying a particular set of principles. Business success depends on a variety of factors. Economics is a useful tool for analyzing how these factors affect the business. Economics can be used to examine questions such as:

* How should a company select a sale or purchase price in a way that rewards its users?

* What are the costs and benefits of users making policy decisions for the company?

* What are the costs and benefits of users owning a company?

* How easy is it for a cooperative business to treat a variety of users equitably?

Using economics to explore the answers to these questions reveals why different industries in our state exhibit different characteristics and gives us a perspective on why certain organizational forms have appeared in businesses throughout history. We also learn how politics and markets affect a social activity such as owning a company.

Greg McKee is an associate professor and director of the Quentin Burdick Center for Cooperatives at NDSU