A business model describes how a business organization creates, delivers, and captures value,Business Model Generation, Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2010 in economic, social, cultural or other contexts. The model describes the specific way in which the business conducts itself, spends, and earns money in a way that generates profit. The process of business model construction and modification is also called business model innovation and forms a 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 an organization or business, including purpose, business process, target customers, offerings, strategies, infrastructure, organizational structures, profit structures, sourcing, trading practices, and operational processes and policies including culture.
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.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 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.George, G and Bock AJ. 2012. Models of opportunity: How entrepreneurs design firms to achieve the unexpected. Cambridge University Press,
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. Business models are also referred to in some instances within the context of accounting for purposes of public reporting.
History According to the Oxford English Dictionary, the term "business model", a compound of business and model, was first used in 1832 in the sense of "a plan for the operation of a business".
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 was employed by Adobe, a software developer that gave away its document reader free of charge but charged 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 Walmart 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 model may depend on how technology is used. For example, entrepreneurs on the internet have created new models that rely entirely on existing or emerging technologies. By leveraging technology, businesses can reach a large number of customers at minimal cost. In addition, the rise of outsourcing and globalization has meant that business models must also account for strategic sourcing, complex supply chains, and a shift toward collaborative, relational contracting structures.Unpacking Sourcing Business Models: 21st Century Solutions for Sourcing Services, The University of Tennessee, 2014
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. In that analysis, the 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 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, these businesses tend to fail. They recommend ways in which entrepreneurs or CEOs can create strong narratives for change. The business model concept is not without its critics (e.g., redundancy) and suggestions for further extensions (e.g., to nonmonetary exchange).Arend, R.J. (2013). The business model: Present and future—beyond a skeumorph. Strategic Organization, 11(4), 390-402.
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. 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. 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 one's own firm's business model.Hummel, E., G. Slowinski, S. Matthews, and E. Gilmont. 2010. Business models for collaborative research. Research Technology Management 53 (6) 51–54.
The University of Tennessee conducted research into highly collaborative business relationships. Researchers codified their research into a sourcing business model known as Vested Outsourcing, 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 that is highly collaborative and mutually beneficial to each.Vitasek, Kate. Vested Outsourcing: Five Rules that will Transform Outsourcing" (New York: Palgrave Macmillan, 2012)
Categorization From about 2012, some research and experimentation has theorized about a so-called "liquid business model".
Shift from pipes to platforms Sangeet Paul Choudary distinguishes between two broad families of business models in an article in Wired magazine.Choudary, Sangeet Paul (2013). "Why Business Models fail: Pipes vs. Platforms". Wired. 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.
In an op-ed on MarketWatch,"What Twitter knows that Blackberry didn't", Choudary, Van Alstyne, Parker, MarketWatch 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. 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 companies that re-use Amazon's on-demand commerce services.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.
Impacts of platform business models Jose van Dijck (2013) identifies three main ways that media platforms choose to monetize, which mark a change from traditional business models. One is the subscription model, in which platforms charge users a small monthly fee in exchange for services. She notes that the model was ill-suited for those "accustomed to free content and services", leading to a variant, the freemium model. A second method is via advertising. Arguing that traditional advertising is no longer appealing to people used to "user-generated content and social networking", she states that companies now turn to strategies of customization and personalization in targeted advertising. Eric K. Clemons (2009) asserts that consumers no longer trust most commercial messages; Van Dijck argues platforms are able to circumvent the issue through personal recommendations from friends or influencers on social media platforms, which can serve as a more subtle form of advertisement. Finally, a third common business model is monetization of data and metadata generated from the use of platforms.
Applications Malone et al."Do Some Business Models Perform Better than Others?", Malone et al., May 2006. 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 healthcare space, and in particular in companies that leverage the power of Artificial Intelligence, the design of business models is particularly challenging as there are a multitude of value creation mechanisms and a multitude of possible stakeholders. An emerging categorization has identified seven archetypes.