Business Model

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Business model

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 ofbusiness strategy.

In theory and practice, the termbusiness 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,
sourcing, trading practices, and operational processes and policies including culture.

Contents
Context
Definition
History
Theoretical and empirical insights
Design logic and narrative coherence
Complementarities between partnering firms
Categorization
Shift from pipes to platforms
Platform
Applications
Design
Definitions
Economic consideration
Component consideration
Strategic outcome

Definitions of design or development


Design themes emphasis
Design content emphasis
Examples
Frameworks
Related concepts
See also
References
Further reading
External links

Context
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 successfulgrowth 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.

Definition
A business model is an "abstract representation of a business, be it conceptual, textual, and/or graphical, of all core interrelated
architectural, co-operational, and financial arrangements designed and developed by an organization presently and in the future, as
well as all core products and/or services the organization offers, or will offer, based on these arrangements that are needed to achieve
its strategic goals and objectives."[5][6] This definition by the authors Al-Debei, El-Haddadeh and Avison (2008) indicates that value
proposition, value architecture (the organizational infrastructure and technological architecture that allows the movement of products,
services, and information), value finance (modeling information related to total cost of ownership, pricing methods, and revenue
[7][8]
structure), and value network articulate the primary constructs or dimensions of business models.

History
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 char
ge 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. In addition, the rise of outsourcing and globalization has meant that business models must
[9]
also account for strategic sourcing, complex supply chains and moves to collaborative, relational contracting structures.

Theoretical and empirical insights

Design logic and narrative coherence


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.[2] 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 theIBM 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.[3] 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 between partnering firms


Berglund and Sandström (2013) argued that business models should be understood from an open systems perspective as opposed to
being a firm-internal concern. Since innovating firms do not have executive control over their surrounding network, business model
innovation tends to require soft power tactics with the goal of aligning heterogeneous interests.[10] In a study of collaborative
research and external sourcing of technology, Hummel et al. (2010) similarly found that in deciding on business partners, it is
important to make sure that both parties' business models are complementary.[11] 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
[12] .
understand key aspects of our own firm's business model.

The University of Tennessee conducted research into highly collaborative business relationships. Researchers codified their research
into a sourcing business model known as Vested (also referred to as Vested Outsourcing). Vested is a hybrid sourcing business model
in which buyers and suppliers in an outsourcing or business relationship focus on shared values and goals to create an arrangement
[13]
that is highly collaborative and mutually beneficial to each.

Categorization
[14][15]
From about 2012, some research and experimentation has theorized about a so-called "liquid business model".

Shift from pipes to platforms


Sangeet Paul Choudary (2013) distinguishes between two broad families of business models in an article in Wired magazine.[16]
Choudary contrasts pipes (linear business models) with platforms (networked business models). In the case of pipes, firms create
goods and services, 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.

Alex Moazed, founder and CEO of Applico, defines a platform as a business model that creates value by facilitating exchanges
between two or more interdependent groups usually consumers and producers of a given value.[17] As a result of digital
transformation, it is the predominant business model of the 21st century
.

In an op-ed on MarketWatch,[18] Choudary, Van Alstyne and Parker further explain how business models are moving from pipes to
platforms, leading to disruption of entire industries.

Platform
There are three elements to a successful platform business model.[19] 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) stated that the business model 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 revenues each year by developing an open platform that supports a community of
[20]
companies that re-use Amazon's on-demand commerce services.

Applications
Malone et al.[21] 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 through2002, 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[22] 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 variousscientific publications.

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.[23][24][25][26] 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.[27] 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
.[28][29][30]
addressing deferred taxes related to investment property

Both IASB and FASB have proposed using the concept of business model in the context of reporting a lessor'slease income and lease
expense within their joint project on accounting for leases.[31][32][33][34][35] In its 2016 lease accounting model, IFRS 16, the IASB
chose not to include a criterion of "stand alone utility" in its lease definition because "entities might reach different conclusions for
contracts that contain the same rights of use, depending on differences between customers' resources or suppliers' business
models."[36] The concept has also been proposed as an approach for determining the measurement and classification when
accounting for insurance contracts.[37][38] 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.[39]

Design
Business model design generally 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. Massa and Tucci (2014) [40] highlighted the difference
between crafting a new business model when none is in place, as it is often the case with academic spinoffs and high technology
entrepreneurship, and changing an existing business model, such as when the tooling company Hilti shifted from selling its tools to a
leasing model. They suggested that the differences are so profound (for example, lack of resource in the former case and inertia and
conflicts with existing configurations and organisational structures in the latter) that it could be worthwhile to adopt different terms
for the two. They suggest business model design to refer to the process of crafting a business model when none is in place and
business model reconfiguration for process of changing an existing business model, also highlighting that the two process are not
mutually exclusive, meaning reconfiguration may involve steps which parallel those of designing a business model.

Definitions
Al-Debei and Avison (2010) define a business model as an abstract representation of an organization. This may be conceptual,
textual, and/or graphical, of all core interrelated architectural, co-operational, and financial arrangements designed and developed by
an organization presently and in the future, as well all core products and/or services the organization offers, or will offer, based on
these arrangements that are needed to achieve its strategic goals and objectives.[5] This definition indicates that value proposition,
[7]
value architecture, value finance, and value network articulate the primary constructs or dimensions of business models.

Economic consideration
Al-Debei and Avison (2010) consider value finance as one of the main dimensions of BM which depicts information related to
costing, pricing methods, and revenue structure. 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. [41]
Component consideration
Osterwalder et al. (2005) consider the Business Model as the blueprint of how a company does business.[42] 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. [43]

Strategic outcome
Mayo and Brown (1999) considered the business model as the design of key interdependent systems that create and sustain a
competitive business. [44] Casadesus-Masanell and Ricart (2011) explain a business model as a set of choices (policy, assets and
governance) and consequences (flexible and rigid) and underline the importance of considering how it interacts with models of other
players in the industryinstead of thinking of it in isolation.[45]

Definitions of design or development


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
[46]
linking and sequencing of the activities and who will perform the activities.

Design themes emphasis


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.[47]

Design content emphasis


Business model design includes the modeling and Environment-Strategy-Structure-Operations (ESSO)
description of a company's: Business Model Development

value propositions
target customer segments
distribution channels
customer relationships
value configurations
core capabilities
commercial network
partner network
cost structure
revenue model
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.[48]
Examples
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 the revenue model). Therefore, more recent
literature on business models concentrate on describing a business model as a whole, instead of only the 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:

Bricks and clicks 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.

Collective business models

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.[49]

Cutting out the middlemanmodel

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 sales model

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."[50]

Distribution business models, various


Fee in, free out

Business model which works by charging the first client a fee for a service, while offering that
service free of charge to subsequent clients.

Franchise

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.

Sourcing business model

Sourcing Business Models are a systems-based approach to structuring supplier


relationships. A sourcing business model is a type of business model that is applied to
business relationships where more than one party needs to work with another party to be
successful. There are seven sourcing business models that range from the transactional to
investment-based. The seven models are: Basic Provider, Approved Provider, Preferred
Provider, Performance-Based/Managed Services Model, Vested outsourcing Business
Model, Shared Services Model, and Equity Partnership Model. Sourcing business models
are targeted for procurement professionals who seek a modern approach to achieve the best
fit between buyers and suppliers. Sourcing business model theory is based on a
collaborative research effort by the University of Tennessee (UT), the Sourcing Industry
Group (SIG)[1], the Center for Outsourcing Research and Education (CORE)[2], and the
International Association for Contracts and Commercial Management (IACCM). This
research formed the basis for the 2016 book, Strategic Sourcing in the New Economy:
Harnessing the Potential of Sourcing Business Models in Modern Procurement.[51]

Freemium business model

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.[52]

Pay what you can (PWYC)

A non-profit or for-profit business model which does not depend on set prices for its goods,
but instead asks customers to pay what they feel the product or service is worth to
them.[53][54][55] It is often used as a promotional tactic,[56] but can also be the regular method
of doing business. It is a variation on the gift economy and cross-subsidization, in that it
depends on reciprocity and trust to succeed.
"Pay what you want" (PWYW) is sometimes used synonymously, but "pay what you can" is
often more oriented to charity or socially oriented uses, based more on ability to pay, while
"pay what you want" is often more broadly oriented to perceived value in combination with
willingness and ability to pay.

Value-added reseller model

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.

Other examples of business models are:

Auction business model


All-in-one business model
Chemical leasing
Low-cost carrier business model
Loyalty business models
Monopolistic business model
Multi-level marketing business model
Network effects business model
Online auction business model
Online content business model
Online media cooperative
Premium business model
Professional open-sourcemodel
Pyramid scheme business model
Razor and blades model
Servitization of products business model
Subscription business model
Frameworks
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".[57] A business framework
involves internal factors (market analysis; products/services promotion; development of trust; social influence and knowledge
[58]
sharing) and external factors (competitors and technological aspects).

A review on business model frameworks can be found in Krumeich et al. (2012).[59] In the following some frameworks are
introduced.

Business reference model

Business reference model is a reference model, concentrating on the architectural aspects


of the core business of an enterprise, service organization or government agency.

Component business model

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.

Industrialization of services business model

Business model used in strategic management and


services marketing that treats service provision as an
industrial process, subject to industrial optimization
procedures

Business Model Canvas

Developed by A. Osterwalder, Yves Pigneur, Alan


Smith, and 470 practitioners from 45 countries, the
business model canvas [1][60] is one of the most used Although Webvan failed in its goal of
frameworks for describing the elements of business disintermediating the North American
models. supermarket industry, several
supermarket chains (likeSafeway Inc.)
OGSM
have launched their own delivery
services to target the niche market to
The OGSM is developed by Marc van Eck and Ellen
which Webvan catered.
van Zanten of Business Openers into the 'Business
plan on 1 page'. Translated in several languages all
over the world. #1 Management book in The
Netherlands in 2015. The foundation of Business plan on 1 page is the OGSM. Objectives,
Goals, Strategies and Measures (dashboard and actions).

Related concepts
The process of business model design is part of business strategy. Business model design and innovation refer to the way a firm (or a
network of firms) defines its business logic at the strategic level.
In contrast, firms implement their business model at the operational level, through their business operations. This refers to their
process-level activities, capabilities, functions and infrastructure (for example, their business processes and business process
modeling), their organisational structures (e.g. organigrams, workflows, human resources) and systems (e.g. information technology
architecture, production lines).

Consequently, an operationally viable and feasible business model requires lateral alignment with the underlining business
operations.[61]

The brand is a consequence of the business model and has a symbiotic relationship with it, because 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
[62]
income are generally not the same as the beneficiaries. The term 'funding model' is generally used instead.

The model is defined by the organization's vision, mission, and values, as well as sets of boundaries for the organization—what
products or services it will deliver, what customers or markets it will target, and what supply and delivery channels it will use. While
the business model includes high-level strategies and tactical direction for how the organization will implement the model, it also
includes the annual goals that set the specific steps the organization intends to undertake in the next year and the measures for their
expected accomplishment. Each of these is likely to be part of internal documentation that is available to the internal auditor
.

See also
Business rule
Concept-driven strategy
Enterprise architecture
Growth platforms
Institutional logic
Market structure
Marketing plan
Sensemaking
Strategy dynamics
Strategy Markup Language
The Design of Business
Value migration

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Further reading
A. Afuah and C. Tucci, Internet Business Models and Strategies, Boston, McGraw Hill, 2003.
T. Burkhart, J. Krumeich, D. Werth, and P. Loos, Analyzing the Business Model Concept — A Comprehensive
Classification of Literature, Proceedings of the International Conference on Information Systems (ICIS 2011). Paper
12. http://aisel.aisnet.org/icis2011/proceedings/generaltopics/12
H. Chesbrough and R. S. Rosenbloom,The Role of the Business Model in capturing value from Innovation:
Evidence from XEROX Corporation's T echnology Spinoff Companies., Boston, Massachusetts, Harvard Business
School, 2002.
Dick Costolo, Business Models,
Marc Fetscherin and Gerhard Knolmayer , Focus Theme Articles: Business Models for Content Delivery: An
Empirical Analysis of the Newspaper and Magazine Industry , International Journal on Media Management, V olume
6, Issue 1 & 2 September 2004, pages 4 – 11, September 2004.
George, G., Bock, AJ.Models of opportunity: How entrepreneurs design firms to achieve the unexpected.
Cambridge University Press, 2012,ISBN 978-0-521-17084-0.
J. Gordijn, Value-based Requirements Engineering - Exploring Innovative e-Commerce Ideas, Amsterdam, Vrije
Universiteit, 2002.
G. Hamel, Leading the revolution., Boston, Harvard Business School Press, 2000.
J. Linder and S. Cantrell,Changing Business Models: Surveying the Landscape , Accenture Institute for Strategic
Change, 2000.
Lindgren, P. and Jørgensen,R., M.-S. Li, Y. Taran, K. F. Saghaug, "Towards a new generation of business model
innovation model", presented at the 12th International CINet Conference: Practicing innovation in times of
discontinuity, Aarhus, Denmark, 10–13 September 2011
Long Range Planning, vol 43 April 2010,"Special Issue on Business Models," includes 19 pieces by leading
scholars on the nature of business models
S. Muegge. Business Model Discovery by Technology Entrepreneurs. Technology Innovation Management Review,
April 2012, pp. 5–16.
S. Muegge, C. Haw, and Sir T. Matthews, Business Models for Entrepreneurs and Startups , Best of TIM Review,
Book 2, Talent First Network, 2013.
Alex Osterwalder et al.Business Model Generation, Co-authored with Yves Pigneur, Alan Smith, and 470
practitioners from 45 countries, self-published, 2009
O. Peterovic and C. Kittl et al.,Developing Business Models for eBusiness., International Conference on Electronic
Commerce 2001, 2001.
Alt, Rainer; Zimmermann, Hans-Dieter: Introduction to Special Section – Business Models. In: Electronic Markets
Anniversary Edition, Vol. 11 (2001), No. 1. link
Santiago Restrepo Barrera,Business model tool, Business life model,Colombia 2012,
http://www.imaginatunegocio.com/#!business-life-model/c1o75 (Spanish)
Paul Timmers. Business Models for Electronic Markets, Electronic Markets, Vol 8 (1998) No 2, pp. 3 – 8.
Peter Weill and M. R. Vitale, Place to space: Migrating to eBusiness Models. , Boston,Harvard Business School
Press, 2001.
C. Zott, R. Amit, & L.Massa. 'The Business Model: Theoretical Roots, Recent Developments, and Future Research',
WP-862, IESE, June, 2010 - revised September 2010PDF) (
Magretta, J. (2002). Why Business Models Matter , Harvard Business Review, May: 86-92.
Govindarajan, V. and Trimble, C. (2011). The CEO’s role in business model reinvention. Harvard Business Review ,
January–February: 108-114.
van Zyl, Jay. (2011). Built to Thrive: using innovation to make your mark in a connected world. Chapter 7owards
T a
universal service delivery platform. San Francisco.

External links
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.

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