Saturday, September 25, 2010

Overview Of Business Model

In the last few years, the concept of the business model has become popular. New types of businesses, often created using the internet, have needed new models. When designing a new business, the model it uses is likely to be a crucial factor in its success. The other type of business that needs to worry about a business model is a business in a steadily declining market.

Chesbrough and Rosenbloom (2002), searching the Web in May 2000, found 107,000 references to the term. In June 2004, the same search found 2,130,000 mentions on Google. However the vast majority of these references are passing references that don't think about what a business model actually is.

Audience Dialogue has evaluated websites for some a variety of organizations, and we've found that many of them have not developed a clear set of objectives for their website - and are thus unable to assess its effectiveness. So we searched the Web, as well as books and academic journal articles, looking for a method of putting together a business model. To our surprise, we didn't find anything usable - so we ended up developing our own concept for a business model.

Despite the two million references to business models, surprisingly few articles have focused on this concept. The most-cited recent article is that by Timmers (1998), which offers a classification scheme for business models for e-commerce. Rappa (2000) extends that scheme, noting that "the business model spells out how a company makes money by specifying where it is positioned in the value chain." He identifies 29 different types of business model, in 9 categories.

Chesbrough and Rosenbloom point out that "while the term ‘business model’ is often used these days, it is seldom defined explicitly." That paper (expanded in Chesbrough's 2003 book) specifies six functions of a business model:

1. to articulate the value proposition
2. to identify a market segment
3. to define the structure of the firm’s value chain
4. to specific the revenue generation mechanisms
5. to describe the position of the firm within the value network
6. to formulate the competitive strategy.

That's a concise summary of what a business model does - but how does it do it? They don't say. Let's move on to Afuah and Tucci (2000), who wrote the book that most specifically covers this topic. However, in 300 pages, it fails to give one full example of a business model. Also, as Dubosson-Torbay (2002) point out, this book "neglects the customer aspect" - it's about what the model does for the business, not for the customers. Alt and Zimmerman (2001), again focusing on the Internet, noticed that the term "business model" was not consistently defined, and that a consensus on the elements of business models was lacking.

Several writers have produced typologies of business models, all focusing on the internet. For example, Bienstock (2002) offer a "complete taxonomy" of web business models, based on four factors: number of buyers, number and type of sellers, nature and frequency of product offering, and price mechanisms. Vassilopoulou (2002) propose a framework for the classification of e-business models, and Betz (2002) came up with yet another taxonomy, developing six generic types of business model. Dubosson-Torbay (2002), in a more detailed article than the others, present a more flexible multidimensional classification scheme. The 2003 article by Hedman and Kalling is also detailed, but again gives a static view of a business model - despite all the evidence that initial business models are often unsuccessful, and need to keep being modified until a viable model is found.

Roger Clarke (2004), in a discussion of the adoption of open-source software, created a framework for e-business models, with four questions:

1. Who pays? (consumer, producer, or third parties?)
2. What for? (e.g goods, services, expertise, assurances of quality or security.)
3. To whom?
4. Why? (e.g. perceived value, or being locked in.)

Answers to those questions, according to Clarke, would form a business model - but again, it's static.

Several writers, including Chesbrough and Rosenbloom (2002) and Magretta (2002, in the Harvard Business Review) emphasize the need for flexibility in a business model for a new enterprise, pointing out that many successful businesses change their initial model. Therefore, a model whose assumptions are transparent is more easily reviewed than a model lacking explicit linkages between its elements.

To summarize the writings on business models, most of the above papers and books focus on producing taxonomies or categorizations, or on stating what business models include or exclude. There was broad agreement between the various definitions in only two areas: that a business model (i) focuses on the mechanisms for generation of revenue in the value chain, in terms of (ii) broad principles (rather than the detail to be found in a full business plan). There was no consistent agreement on the other aspects of a business model.

However, when it comes to the question of "what does a business model actually look like?" only Chesbrough and Rosenbloom (2002) and Afuah and Tucci (2000) offer detailed descriptions - but their concepts of a business model are so detailed that others would describe such a model as a business plan.

Bearing in mind the use of the term "model" in systems theory, and that many of the above articles were from ICT-oriented journals, one might have expected to find a business model defined in systems terms - with inputs, processes, and outputs. However, of the 50-odd articles we looked at, only one by Betz (2002) used such an approach - and then only in a very general sense.


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