Business model

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A business model describes the rationale of how an organization creates, delivers, and captures value,[1] in economic, social, cultural or other contexts. The process of business model construction is part of business strategy.

In theory and practice, the term business model is used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose, business process, target customers, offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies. The literature has provided very diverse interpretations and definitions of a business model. A systematic review and analysis of manager responses to a survey defines business models as the design of organizational structures to enact a commercial opportunity.[2] Further extensions to this design logic emphasize the use of narrative or coherence in business model descriptions as mechanisms by which entrepreneurs create extraordinarily successful growth firms.[3]

Business models are used to describe and classify businesses, especially in an entrepreneurial setting, but they are also used by managers inside companies to explore possibilities for future development. Well-known business models can operate as "recipes" for creative managers.[4] Business models are also referred to in some instances within the context of accounting for purposes of public reporting.

History[edit]

Over the years, business models have become much more sophisticated. The bait and hook business model (also referred to as the "razor and blades business model" or the "tied products business model") was introduced in the early 20th century. This involves offering a basic product at a very low cost, often at a loss (the "bait"), then charging compensatory recurring amounts for refills or associated products or services (the "hook"). Examples include: razor (bait) and blades (hook); cell phones (bait) and air time (hook); computer printers (bait) and ink cartridge refills (hook); and cameras (bait) and prints (hook). A variant of this model is Adobe, a software developer that gives away its document reader free of charge but charges several hundred dollars for its document writer.

In the 1950s, new business models came from McDonald's Restaurants and Toyota. In the 1960s, the innovators were Wal-Mart and Hypermarkets. The 1970s saw new business models from FedEx and Toys R Us; the 1980s from Blockbuster, Home Depot, Intel, and Dell Computer; the 1990s from Southwest Airlines, Netflix, eBay, Amazon.com, and Starbucks.

Today, the type of business models might depend on how technology is used. For example, entrepreneurs on the internet have also created entirely new models that depend entirely on existing or emergent technology. Using technology, businesses can reach a large number of customers with minimal costs.

Theoretical and empirical insights to business models[edit]

Design logic and narrative coherence[edit]

Design logic views the business model as an outcome of creating new organizational structures or changing existing structures to pursue a new opportunity. Gerry George and Adam Bock (2011) conducted a comprehensive literature review and surveyed managers to understand how they perceived the components of a business model. In that analysis, these authors show that there is a design logic behind how entrepreneurs and managers perceive and explain their business model. In further extensions to the design logic, George and Bock (2012) use case studies and the IBM survey data on business models in large companies to describe how CEOs and entrepreneurs create narratives or stories in a coherent manner to move the business from one opportunity to another. They also show that when the narrative is incoherent or the components of the story are misaligned that these businesses tend to fail. They recommend ways in which the entrepreneur or CEO can create strong narratives for change.

Complementarities of business models between partnering firms[edit]

Studying collaborative research and the accessing of external sources of technology, Hummel et al. (2010) found that in deciding on business partners, it is important to make sure that both parties’ business models are complementary.[5] For example, they found that it was important to identify the value drivers of potential partners by analyzing their business models, and that it is beneficial to find partner firms that understand key aspects of our own firm’s business model.[6]

Taxonomy of Business Models[edit]

Shift from Pipes to Platforms[edit]

Sangeet Paul Choudary (2013) distinguishes between two broad families of business models in an article on Wired Magazine.[7] Choudary, of Platform Thinking,[8] contrasts Pipes, linear business models, with Platforms, networked business models. In the case of Pipes, firms create stuff, push them out and sell them to customers. Value is produced upstream and consumed downstream. There is a linear flow, much like water flowing through a pipe. Unlike pipes, platforms do not just create and push stuff out. They allow users to create and consume value.

In an op-ed on MarketWatch,[9] Choudary, Van Alstyne and Parker further explain how business models are moving from Pipes to Platforms leading to disruption of entire industries.

Platform Business Models[edit]

In an earlier article on Harvard Business Review,[10] Sangeet Paul Choudary elaborates on the three elements of a successful platform business model. The Toolbox creates connection by making it easy for others to plug into the platform. This infrastructure enables interactions between participants. The Magnet creates pull that attracts participants to the platform. For transaction platforms, both producers and consumers must be present to achieve critical mass. The Matchmaker fosters the flow of value by making connections between producers and consumers. Data is at the heart of successful matchmaking, and distinguishes platforms from other business models.

Chen (2009) pointed out that the business model in the twenty-first century has to take into account the capabilities of Web 2.0, such as collective intelligence, network effects, user generated content, and the possibility of self-improving systems. He suggested that the service industry such as the airline, traffic, transportation, hotel, restaurant, Information and Communications Technology and Online gaming industries will be able to benefit in adopting business models that take into account the characteristics of Web 2.0. He also emphasized that Business Model 2.0 has to take into account not just the technology effect of Web 2.0 but also the networking effect. He gave the example of the success story of Amazon in making huge profits each year by developing a full blown open platform that supports a large and thriving community of companies that re-use Amazon’s On Demand commerce services.[11]

Applications[edit]

Malone et al.[12] at MIT found that some business models, as defined by them, indeed performed better than others in a dataset consisting of the largest U.S. firms, in the period 1998 through 2002, while they did not prove whether the existence of a business model mattered.

In the context of the Software-Cluster, which is funded by the German Federal Ministry of Education and Research, a business model wizard for software companies has been developed. It supports the design and analysis of software business models. The tool's underlying concept and data were published in various scientific publications.[13]

The concept of a business model has been incorporated into certain accounting standards. For example, the International Accounting Standards Board (IASB) utilizes an "entity's business model for managing the financial assets" as a criterion for determining whether such assets should be measured at amortized cost or at fair value in its financial instruments accounting standard, IFRS 9.[14][15][16][17] In their 2013 proposal for accounting for financial instruments, the Financial Accounting Standards Board also proposed a similar use of business model for classifying financial instruments.[18] The concept of business model has also been introduced into the accounting of deferred taxes under International Financial Reporting Standards with 2010 amendments to IAS 12 addressing deferred taxes related to investment property.[19][20][21]

Both IASB and FASB have proposed using the concept of business model in the context of reporting a lessor's lease income and lease expense within their joint project on accounting for leases.[22][23][24][25][26] The concept has also been proposed as an approach for determining the measurement and classification when accounting for insurance contracts.[27][28] As a result of the increasing prominence the concept of business model has received in the context of financial reporting, the European Financial Reporting Advisory Group (EFRAG), which advises the European Union on endorsement of financial reporting standards, commenced a project on the "Role of the Business Model in Financial Reporting" in 2011.[29]

Business model design[edit]

Business model design refers to the activity of designing a company's business model. It is part of the business development and business strategy process and involves design methods.

Definitions of business model[edit]

Economic consideration[edit]

Stewart and Zhao (2000) defined the business model as ‘‘a statement of how a firm will make money and sustain its profit stream over time.’’ [30]

Component consideration[edit]

Osterwalder et al. (2005) consider the Business Model as the blueprint of how a company does business.[31] Slywotzky (1996) regards the business model as ‘‘the totality of how a company selects its customers, defines and differentiates it offerings, defines the tasks it will perform itself and those it will outsource, configures its resources, goes to market, creates utility for customers and captures profits.’’ [32]

Strategic outcome[edit]

Mayo and Brown (1999) considered the business model as ‘‘the design of key interdependent systems that create and sustain a competitive business.’’ [33]

Definitions of business model design or development[edit]

Zott and Amit (2009) consider business model design from the perspectives of design themes and design content. Design themes refer to the system’s dominant value creation drivers and design content examines in greater detail the activities to be performed, the linking and sequencing of the activities and who will perform the activities.[34]

Design themes emphasis of business model design[edit]

Environment-Strategy-Structure-Operations (ESSO) Business Model Development

Developing a Framework for Business Model Development with an emphasis on Design Themes, Lim (2010) proposed the Environment-Strategy-Structure-Operations (ESSO) Business Model Development which takes into consideration the alignment of the organization’s strategy with the organization's structure, operations, and the environmental factors in achieving competitive advantage in varying combination of cost, quality, time, flexibility, innovation and affective.[35]

Design content emphasis of business model design[edit]

Business model design includes the modeling and description of a company's:

  • value propositions
  • target customer segments
  • distribution channels
  • customer relationships
  • value configurations
  • core capabilities
  • partner network
  • cost structure
  • revenue model

Business model design is distinct from business modeling. The former refers to defining the business logic of a company at the strategic level, whereas the latter refers to business process design at the operational level.

A business model design template can facilitate the process of designing and describing a company's business model.

Daas et al. (2012) developed a decision support system (DSS) for business model design. In their study a decision support system (DSS) is developed to help SaaS in this process, based on a design approach consisting of a design process that is guided by various design methods.[36]

Examples of business models[edit]

In the early history of business models it was very typical to define business model types such as bricks-and-mortar or e-broker. However, these types usually describe only one aspect of the business (most often revenue model). Therefore, more recent literature on business models concentrates on describing business model as a whole instead of one most visible aspects.

The following examples provide an overview for various business model types that have been in discussion since the invention of term business model:

Business model by which a company integrates both offline (bricks) and online (clicks) presences. One example of the bricks-and-clicks model is when a chain of stores allows the user to order products online, but lets them pick up their order at a local store.
Business system, organization or association typically composed of relatively large numbers of businesses, tradespersons or professionals in the same or related fields of endeavor, which pools resources, shares information or provides other benefits for their members. For example, a science park or high-tech campus provides shared resources (e.g. cleanrooms and other lab facilities) to the firms located on its premises, and in addition seeks to create an innovation community among these firms and their employees.[37]
The removal of intermediaries in a supply chain: "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate (such as a distributor, wholesaler, broker, or agent), companies may now deal with every customer directly, for example via the Internet.
Direct selling is marketing and selling products to consumers directly, away from a fixed retail location. Sales are typically made through party plan, one-to-one demonstrations, and other personal contact arrangements. A text book definition is: "The direct personal presentation, demonstration, and sale of products and services to consumers, usually in their homes or at their jobs."[38]
Value Added Reseller is a model where a business makes something which is resold by other businesses but with modifications which add value to the original product or service. These modifications or additions are mostly industry specific in nature and are essential for the distribution. Businesses going for a VAR model have to develop a VAR network. It is one of the latest collaborative business models which can help in faster development cycles and is adopted by many Technology companies especially software.
Business model which works by charging the first client a fee for a service, while offering that service free of charge to subsequent clients.
Franchising is the practice of using another firm's successful business model. For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. The franchisor's success is the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.
Business model that works by offering basic Web services, or a basic downloadable digital product, for free, while charging a premium for advanced or special features.[39]

Other examples of business models are:

Business model frameworks[edit]

Technology centric communities have defined "frameworks" for business modeling. These frameworks attempt to define a rigorous approach to defining business value streams. It is not clear, however, to what extent such frameworks are actually important for business planning. Business model frameworks represent the core aspect of any company; they involve “the totality of how a company selects its customers defines and differentiates its offerings, defines the tasks it will perform itself and those it will outsource, configures its resource, goes to market, creates utility for customers, and captures profits”.[40] A business framework involves internal factors (market analysis; products/services promotion; development of trust; social influence and knowledge sharing) and external factors (competitors and technological aspects).[41] A state of the art review on business model frameworks can be found in Krumeich et al. (2012).[42] In the following some frameworks are introduced.

Business reference model is a reference model, concentrating on the architectural aspects of the core business of an enterprise, service organization or government agency.
Technique developed by IBM to model and analyze an enterprise. It is a logical representation or map of business components or "building blocks" and can be depicted on a single page. It can be used to analyze the alignment of enterprise strategy with the organization's capabilities and investments, identify redundant or overlapping business capabilities, etc.
Although Webvan failed in its goal of disintermediating the North American supermarket industry, several supermarket chains (like Safeway Inc.) have launched their own delivery services to target the niche market to which Webvan catered.
Business model used in strategic management and services marketing that treats service provision as an industrial process, subject to industrial optimization procedures
Developed by A. Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, the business model canvas [1][43] is one of the most used frameworks for describing the elements of business models.

Related concepts[edit]

The process of business model design is part of business strategy. The implementation of a company's business model into organisational structures (e.g. organigrams, workflows, human resources) and systems (e.g. information technology architecture, production lines) is part of a company's business operations.

It is important to understand that the implementation of business model is enabled by business operations, which refers to the firms process-level activities, capabilities, functions and infrastructure (e.g., business processs and business process modeling), at the operational level, whereas business model design and innovation refer to defining the business logic of a firm (or a network of firms) at the strategic level. Hence, an operationally viable and feasible business model requires lateral alignment with the underlining business operations.[44]

The brand is a consequence of and has a symbiotic relationship with the business model since the business model determines the brand promise and the brand equity becomes a feature of the model. Managing this is a task of integrated marketing.

The standard terminology and examples of business models do not apply to most nonprofit organizations, since their sources of income are generally not the same as the beneficiaries. The term funding model is generally used instead.[45]

See also[edit]

References[edit]

  1. ^ a b Business Model Generation, A. Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self published, 2010
  2. ^ George,G and Bock AJ. 2011. The business model in practice and its implications for entrepreneurship research. Entrepreneurship Theory and Practice, 35(1): 83-111
  3. ^ George,G and Bock AJ. 2012. Models of opportunity: How entrepreneurs design firms to achieve the unexpected. Cambridge University Press, ISBN 978-0-521-17084-0
  4. ^ Baden-Fuller, Charles; Mary S. Morgan (2010). "Business Models as Models". Long Rang Planning 43 (2/3): 156–171. 
  5. ^ Karl M. Popp and Ralf Meyer (2010). Profit from Software Ecosystems: Business Models, Ecosystems and Partnerships in the Software Industry. Norderstedt, Germany: BOD. ISBN 3-8391-6983-6. 
  6. ^ Hummel, E., G. Slowinski, S. Matthews, and E. Gilmont. 2010. Business models for collaborative research. Research Technology Management 53 (6) 51-54.
  7. ^ Why Business Models fail: Pipes vs. Platforms, Sangeet Paul Choudary, Wired Magazine
  8. ^ Platform Thinking, Sangeet Paul Choudary
  9. ^ What Twitter knows that Blackberry didn't, Choudary, Van Alstyne, Parker, MarketWatch
  10. ^ Three elements of a successful platform, Sangeet Paul Choudary, Harvard Business Review
  11. ^ Chen, T. F. 2009. Building a platform of Business Model 2.0 to creating real business value with Web 2.0 for web information services industry. International Journal of Electronic Business Management 7 (3) 168-180.
  12. ^ Do Some Business Models Perform Better than Others?, Malone et al., May 2006
  13. ^ Software Industry Survey, Pussep, A; Schief,M and Buxmann,P Sep 2012
  14. ^ International Financial Reporting Standard 9: Financial Instruments. International Accounting Standards Board. October 2010. p. A312. 
  15. ^ "The beginning of the end for IAS 39 - Issue of IFRS 9 regarding Classification and Measurement of Financial Assets". Deloitte & Touche. November 2009. Retrieved 2011-06-03. 
  16. ^ "Business Models Matter (for Accounting, That Is)". cfo.com. Retrieved 2011-06-03. 
  17. ^ "An optimist sees the opportunity in every difficulty: is IFRS 9 an opportunity or a difficulty?". Ernst & Young. December 2010. Retrieved 2011-06-03. 
  18. ^ "FASB Exposure Draft: Recognition and Measurement of Financial Assets and Financial Liabilities". Financial Accounting Standards Board. April 12, 2013. p. 174. Retrieved 2013-06-11. 
  19. ^ International Accounting Standard 12: Income Taxes. International Accounting Standards Board. December 31, 2010. p. A508. 
  20. ^ "IASB issues amendments to IAS 12". Deloitte & Touche. January 2010. Retrieved 2011-06-03. 
  21. ^ "Amendments to IAS 12:Income Taxes". Ernst & Young. December 2010. Retrieved 2011-06-03. 
  22. ^ "Exposure Draft:Leases". International Accounting Standards Board. August 2010. p. 31. Retrieved 2011-06-03. 
  23. ^ "Exposure Draft: Leases". Financial Accounting Standards Board. August 17, 2010. p. 29. Retrieved 2011-06-03. 
  24. ^ "Project Update: Leases—Joint Project of the FASB and the IASB". Financial Accounting Standards Board. August 1, 2012. Retrieved 2012-08-02. 
  25. ^ "Exposure Draft: Leases". International Accounting Standards Board. May 2013. p. 30. Retrieved 2013-06-11. 
  26. ^ "FASB Exposure Draft: Leases". Financial Accounting Standards Board. May 16, 2013. p. 82. Retrieved 2013-06-11. 
  27. ^ "Application of business model to insurance contracts". HUB global insurance group. Retrieved 2011-06-03. 
  28. ^ "FASB Education Session - Insurance Contracts:PricewaterhouseCoopers Summary of the Meeting". PricewaterhouseCoopers. February 9, 2010. Retrieved 2011-06-03. 
  29. ^ "EFRAG calls for candidates for an Advisory Panel on the proactive project on the Role of the Business Model in Financial Reporting". European Financial Reporting Advisory Group. December 15, 2010. Retrieved 2011-06-03. 
  30. ^ Lee, G. K. and R. E. Cole. 2003. Internet Marketing, Business Models and Public Policy. Journal of Public Policy and Marketing 19 (Fall) 287-296.
  31. ^ Osterwalder, A., Pigneur, Y. and C. L. Tucci. 2005. Clarifying Business Models: Origins, Present, and Future of the Concept. Communications of the Association for Information Systems 16 1-40.
  32. ^ Slywotzky, A. J. 1996. Value Migration. Boston (MA): Harvard Business Review Press.
  33. ^ Mayo, M. C. and G.S. Brown. 1999. Building a Competitive Business Model. Ivey Business Journal63 (3) 18-23.
  34. ^ Zott, C. and R. Amit. 2009. Business Model Design: An Activity System Perspective. Long Range Planning 43 216-226
  35. ^ Lim, M. 2010. Environment-Strategy-Structure-Operations (ESSO) Business Model. Knowledge Management Module at Bangor University, Wales.
  36. ^ Daas, D., Hurkmans, T., Overbeek, S. and Bouwman, H. 2012. Developing a decision support system for business model design. Electronic Markets - The International Journal on Networked Business, published Online 29. Dec. 2012.
  37. ^ M van der Borgh, M Cloodt & AGL Romme (2012). Value creation by knowledge-based ecosystems: Evidence from a field study. R&D Management, vol. 42: 150-169.
  38. ^ Michael A. Belch George E. Belch Advertising and Promotion: An Integrated Marketing Communications Perspective, 7/e., McGraw-Hill/Irwin, 2006
  39. ^ JLM de la Iglesia, JEL Gayo, "Doing business by selling free services". Web 2.0: The Business Model, 2008. Springer
  40. ^ Slywotzky, A. J. (1996). Value migration: How to think several moves ahead of the competition. Boston, MA: Harvard Business School Press.
  41. ^ Ferri Fernando, D'Andrea Alessia, Grifoni Patrizia (2012). IBF: An Integrated Business Framework for Virtual Communities in Journal of electronic commerce in organizations; IGI Global, Hershey (Stati Uniti d'America)
  42. ^ J. Krumeich, T. Burkhart, D. Werth, and P. Loos. Towards a Component-based Description of Business Models: A State-of-the-Art Analysis. Americas Conference on Information Systems (AMCIS 2012) Proceedings. Paper 19. http://aisel.aisnet.org/amcis2012/proceedings/EBusiness/19
  43. ^ The Business Model Ontology - A Proposition In A Design Science Approach
  44. ^ "Solaimani, S. 2014. The alignment of Business Model and Business Operations within Networked Enterprise Environments. PhD Dissertation, Delft University of Technology, The Netherlands."
  45. ^ William Foster, Peter Kim, Barbara Christiansen. Ten Nonprofit Funding Models, Stanford Social Innovation Review. 2009-03-05.

Further reading[edit]

  • Analyzing the Business Model Concept — A Comprehensive Classification of Literature, T. Burkhart, J. Krumeich, D. Werth, and P. Loos, Proceedings of the International Conference on Information Systems (ICIS 2011). Paper 12. http://aisel.aisnet.org/icis2011/proceedings/generaltopics/12
  • 'The Business Model: Theoretical Roots, Recent Developments, and Future Research', C. Zott, R. Amit, & L.Massa., WP-862, IESE, June, 2010 - revised September 2010 (PDF)
  • Business Model Discovery by Technology Entrepreneurs. S. Muegge. Technology Innovation Management Review, April 2012, pp. 5–16.
  • Business Models for Entrepreneurs and Startups, S. Muegge, C. Haw, and Sir T. Matthews, Best of TIM Review, Book 2, Talent First Network, 2013.
  • Models of opportunity: How entrepreneurs design firms to achieve the unexpected. George, G., Bock, AJ. Cambridge University Press, 2012, ISBN 978-0-521-17084-0.
  • Business model tool, Business life model by Santiago Restrepo Barrera, Colombia 2012, http://www.imaginatunegocio.com/#!business-life-model/c1o75 (Spanish)
  • "Special Issue on Business Models" Long Range Planning, vol 43 April 2010, that includes 19 pieces by leading scholars on the nature of business models
  • The Role of the Business Model in capturing value from Innovation: Evidence from XEROX Corporation’s Technology Spinoff Companies., H. Chesbrough and R. S. Rosenbloom, Boston, Massachusetts, Harvard Business School, 2002.
  • Leading the revolution., G. Hamel, Boston, Harvard Business School Press, 2000.
  • Changing Business Models: Surveying the Landscape, J. Linder and S. Cantrell, Accenture Institute for Strategic Change, 2000.
  • Developing Business Models for eBusiness., O. Peterovic and C. Kittl et al., International Conference on Electronic Commerce 2001, 2001.
  • Place to space: Migrating to eBusiness Models., P. Weill and M. R. Vitale, Boston,Harvard Business School Press, 2001.
  • Value-based Requirements Engineering - Exploring Innovative e-Commerce Ideas, J. Gordijn, Amsterdam, Vrije Universiteit, 2002.
  • Internet Business Models and Strategies, A. Afuah and C. Tucci, Boston, McGraw Hill, 2003.
  • Focus Theme Articles: Business Models for Content Delivery: An Empirical Analysis of the Newspaper and Magazine Industry, Marc Fetscherin and Gerhard Knolmayer, International Journal on Media Management, Volume 6, Issue 1 & 2 September 2004, pages 4 – 11, September 2004.
  • Business Model Generation, A. Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2009
  • Sustaining Digital Resources: An on-the-ground view of projects today, Ithaka, November 2009. Overview of the models being deployed and analysis on the effects of income generation and cost management.
  • Paul Timmers: Business Models for Electronic Markets, Electronic Markets, Vol 8 (1998) No 2, pp. 3 – 8.
  • Alt, Rainer; Zimmermann, Hans-Dieter: Introduction to Special Section – Business Models. In: Electronic Markets Anniversary Edition, Vol. 11 (2001), No. 1. link