Business model

From Wikipedia, the free encyclopedia

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:

“	A business model is a conceptual tool that contains a big set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.	”
	— Osterwalder, Pigneur and Tucci (2005)

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.

1 Components of a business model
2 Evolution
- 2.1 Example business models over the years
3 Do Business Models Matter?
4 Related Concepts
- 4.1 See also
5 External links

[edit] 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 compliment 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 overhead.
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.

[edit] 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.

[edit] Example business models over the years

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 rock star business model

[edit] 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.

[edit] 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.