The term 'business model' describes a broad range of informal and formal models that are used by enterprises to represent various aspects of business, such as operational processes, organizational structures, and financial forecasts. Although the term can be traced to the 1950s, it achieved mainstream usage only in the 1990s. Many informal definitions of the term can be found in popular business literature, such as the following:
More recently, researchers build definitions based on economic and organizational theories and show that the definitions are econometrically sound. For example,
Malone, et al. (2006) at
MIT propose an operational definition of business model, based on theories such as those from
transaction cost economics.
Zott and Amit (2002) from
INSEAD and
Wharton based their definition on boundary-spanning transactions.
Components of a business model
Many different conceptualizations of business models exist (Chesbrough and Rosenbloom 2000; Hamel 2000; Linder and Cantrell 2000; Petrovic, Kittl et al.; Weill and Vitale 2001; Gordijn 2002; Afuah and Tucci 2003; Osterwalder 2004;
Fetscherin & Knolmayer 2005). They all have various degrees of resemblance or difference. The model proposed by
Osterwalder (2004) synthesises the different conceptualizations into a single reference model based on the similarities of a large range of models. The author's conceptualization describes a business model as consisting of nine related business model building blocks. Thus, a business model describes a company's business:
'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.
'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.
These 9 business model building blocks constitute a
business model design template which allows companies to describe their business model.
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.
Example business models over the years
★ The
open business model
★ The
subscription business model
★ The
razor and blades business model (bait and hook)
★ The
pyramid scheme business model
★ The
multi-level marketing business model
★ The
network effects business model
★ The
monopolistic business model
★ The
cutting out the middleman model
★ The
auction business model
★ The
online auction business model
★ The
bricks and clicks business model
★ The
loyalty business models
★ The
Collective business models
★ The
industrialization of services business model
★ The
servitization of products business model
★ The
low-cost carrier business model
★ The
online content business model
★ The
freemium business model
★ The
premium business model
★ The
direct sales model
★ The
professional open-source model
★ Various
distribution business models
Do Business Models Matter?
Malone et al. (2006) 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.
Zott and Amit (2002) also link business models to performance, in the context of 190 young, growth-oriented firms in the US and Europe that had gone public between 1996 and 2000. See also their additional research
on value drivers.
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
★
Business model design
★
Business process modeling
★
Business plan
★
Growth Platforms
★
Market forms
★
Marketing
★
Marketing plan
★
Monopoly
★
Strategic management
★
Strategic planning
★
Value migration
★
Business rule
External links
★
Business Modeling Forum Business modeling community web that includes information about business process modeling specifications, tools, and publications.
★
Business Model: A Bridge between Technology and Business
★
TKO Business Modelling Software
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