Business model


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A business model is a term used to describe a profit-producing system that has an important degree of independence from the other systems within an enterprise. The term is widely used for a broad range of informal and formal descriptions of the purpose, offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies.

Contents

Conceptualization

Conceptualizations of business models try to formalize informal descriptions into building blocks and their relationships[1]. While many different conceptualizations exist[2][3][4][5][6][7][8][9], Osterwalder proposed[10] a synthesis of different conceptualizations into a single reference model based on the similarities of a large range of models, and constitutes a business model design template which allows enterprises to describe their business model:

Business model design template: Nine building blocks and their relationships, Osterwalder 2004[10]

Infrastructure

  • Core capabilities: The capabilities and competencies necessary to execute a company's business model.
  • Partner network: The business alliances which complement other aspects of the business model.
  • Value configuration: The rationale which makes a business mutually beneficial for a business and its customers.

Offering

  • Value proposition: The products and services a business offers. Quoting Osterwalder (2004), a value proposition "is an overall view of .. products and services that together represent value for a specific customer segment. It describes the way a firm differentiates itself from its competitors and is the reason why customers buy from a certain firm and not from another."

Customers

  • Target customer: The target audience for a business' products and services.
  • Distribution channel: The means by which a company delivers products and services to customers. This includes the company's marketing and distribution strategy.
  • Customer relationship: The links a company establishes between itself and its different customer segments. The process of managing customer relationships is referred to as customer relationship management.

Finances

  • Cost structure: The monetary consequences of the means employed in the business model. A company's DOC.
  • Revenue: The way a company makes money through a variety of revenue flows. A company's income.

Evolution

A brief history of the development of business models might run as follows. The oldest and most basic business model is the shop keeper model. This involves setting up a store in a location where potential customers are likely to be and displaying a product or service.

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). An interesting variant of this model is a software developer that gives away its word processor reader for free but charges several hundred dollars for its word processor 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. Poorly thought out business models were a problem with many dot-coms.

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.

Examples over the years

Do Business Models Matter?

Malone et al.[11] at MIT find 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 or not the existence of a business model mattered or not.

Perhaps the most overlooked dimension in developing a business model especially for a new product/service/business is the dimension of time, more specifically the timing of investments/expenses or cash flow out versus the receipt of revenues/accounts receivables or cash flow in. The principle issues are: 1) Essentially how much of the product or service has to be built before customers can make some level of either actual purchase decision and/or purchase commitment? 2) How much investment/expense is required to secure these revenues/commitments from customers? and 3 )How much risk is there in achieving net positive cash flow, given the required upfront investment and the future time to capture revenues/receivables cash inflow, within an acceptable timeframe, if ever?

These business model issues often make or break new ventures. Business models that are optimized to reduce the upfront investment, that accelerate the revenue/receivables cash inflow, that obtain cogent and reliable customer feedback often and earlier, and that take other measures to reduce the investment risk all have a higher probability of business success.

For example, in the entertainment industry, does one have to produce a movie for $100 million plus before any box office revenues can be derived, or can the business model be evolved by licensing certain established characters/signing leading movie stars for secondary licensing rights for fast-food chain promotional-tie-ins, movie merchandise licenses, etc. can generate pre-release cash inflow through licensing fees? Or a different entertainment business model might be to create and promote a "Weirdest Video" website platform for users to contribute the content and then based on site traffic, sell advertising for revenues. Here, the upfront investment for creating and promoting the site could be a fraction of the investment to produce a movie and the chances that it would be more popular than a movie may be much higher, as it can be tweaked as it is developed while a movie is an all or nothing production.

It comes down to a nitty gritty question: Can we make to order or do we have to create a new mousetrap and then wait to see if the world will come to it, or somewhere in-between?

Related Concepts

The process of business model design is part of business strategy. The implementation of a company's business model into organizational 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 business modeling commonly refers to business process design at the operational level, whereas business models and business model design refer to defining the business logic of a company at the strategic level.

See also

References

  1. ^ Not to be confused with the term business architecture that structures the accountability over business activities
  2. ^ The Role of the Business Model in captualue from Innovation: Evidence from XEROX Corporation’s Technology Spinoff Companies., H. Chesbrough and R. S. Rosenbloom , Boston, Massachusetts, Harvard Business School, 2000.
  3. ^ Leading the revolution., G. Hamel, Boston, Harvard Business School Press, 2000.
  4. ^ Changing Business Models: Surveying the Landscape, J. Linder and S. Cantrell, Accenture Institute for Strategic Change, 2000.
  5. ^ Developing Business Models for eBusiness., O. Peterovic and C. Kittl et al., International Conference on Electronic Commerce 2001, 2001.
  6. ^ Place to space: Migrating to eBusiness Models., P. Weill and M. R. Vitale, Boston,Harvard Business School Press, 2001.
  7. ^ Value-based Requirements Engineering - Exploring Innovative e-Commerce Ideas, J. Gordijn, Amsterdam, Vrije Universiteit, 2002.
  8. ^ Internet Business Models and Strategies, A. Afuah and C. Tucci, Boston, McGraw Hill, 2003.
  9. ^ 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.
  10. ^ a b The Business Model Ontology - A Proposition In A Design Science Approach, Thesis by Alexander Osterwalder, 2004
  11. ^ Do Some Business Models Perform Better than Others?, Malone et al., May 2006

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