Business Models

Business model

From Wikipedia, the free encyclopedia

A business model describes the rationale of how an organization creates, delivers, and captures value^[1] - economic, social, or other forms of value. The process of business model design is 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 abusiness, including purpose, offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies. Hence, it gives a complete picture of an organization from high-level perspective.

Whenever a business is established, it either explicitly or implicitly employs a particular business model that describes the design or architecture of the value creation, delivery, and capture mechanisms employed by the business enterprise. The essence of a business model is that it defines the manner by which the business enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit: it thus reflects management's hypothesis about what customers want, how they want it, and how an enterprise can organize to best meet those needs, get paid for doing so, and make a profit.^[2]

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. Finally, well known business models operate as recipes for creative managers.^[3]

Contents  [hide] 1 History 2 Examples of Revenue Model 3 Business model topics 3.1 Business model design template 3.2 Complementarities of business models between partnering firms 3.3 Business Model 2.0 4 Applications 5 Related concepts 6 See also 7 Further reading 8 References

[edit]History

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 Adobe, a software developer that gives away its document reader free of charge but charges 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 Wal-Mart andHypermarkets. 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 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]Examples of Revenue Model

• Bricks and clicks business model :

Business model by which a company integrates both both offline (bricks) and online (clicks) presences. One example of the bricks-and-clicks model is when a chain of stores allows the user to order products online, but lets them pick up their order at a local store.

• Collective business models

Business organization or association typically composed of relatively large numbers of businesses, tradespersons or professionals in the same or related fields of endeavor, which pools resources, shares information or provides other benefits for their members.

• Component business model

Technique developed by IBM to model and analyze an enterprise. It is a logical representation or map of business components or "building blocks" and can be depicted on a single page. It can be used to analyze the alignment of enterprise strategy with the organization's capabilities and investments, identify redundant or overlapping business capabilities, etc.

Although Webvan failed in its goal of disintermediating the North Americansupermarket industry, several supermarket chains (like Safeway Inc.) have launched their own delivery services to target the niche market to which Webvan catered.

• Cutting out the middleman model

The removal of intermediaries in a supply chain: "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate (such as a distributor, wholesaler, broker, or agent), companies may now deal with every customer directly, for example via the Internet.

• Direct sales model

Direct selling is marketing and selling products, direct to consumers away from a fixed retail location. Sales are typically made through party plan, one to one demonstrations, and other personal contact arrangements. A text book definition is: "The direct personal presentation, demonstration, and sale of products and services to consumers, usually in their homes or at their jobs."^[4]

• Distribution business models, various
• Fee in, free out

Business model which works by charging the first client a fee for a service, while offering that service free of charge to subsequent clients.

• Franchise

Franchising is the practice of using another firm's successful business model. For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. The franchisor's success is the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.

• Freemium business model

Business model that works by offering basic Web services, or a basic downloadable digital product, for free, while charging a premium for advanced or special features.^[5]

• Industrialization of services business model

Business model used in strategic management and services marketing that treats service provision as an industrial process, subject to industrial optimization procedures

Other business models are:

• Auction business model
• All-in-one business model
• Low-cost carrier business model
• Loyalty business models
• Monopolistic business model
• Multi-level marketing business model
• Network effects business model
• Online auction business model
• Online content business model
• Premium business model
• Professional open-source model
• Pyramid scheme business model
• Razor and blades business model
• Servitization of products business model
• Subscription business model

[edit]Business model topics

Business Model Canvas: Nine business model building blocks, Osterwalder, Pigneur, & al. 2010^[1]

[edit]Business model design template

Formal descriptions of the business become the building blocks for its activities. Many different business conceptualization exist.

Osterwalder's work ^[1][6] propose a single reference model, called Business Model Canvas based on the similarities of a wide range of business model conceptualizations.

With this business model design template, an enterprise can easily describe their business model. Aspects of the template are Infrastructure, Offering, Customers, Finances, etc.

[edit]Complementarities of business models between partnering firms

Studying collaborative research and the accessing of external sources of technology, Hummel et al. (2010) 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 our own firm's business model.^[7]

[edit]Business Model 2.0

Chen (2009) pointed out that the business model in the twenty-first century 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 profits each year by developing a full blown open platform that supports a large and thriving community of companies that re-use Amazon's On Demand commerce services.^[8]

[edit]Applications

Malone et al.^[9] at MIT 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.

[edit]Related concepts

The process of business model design is part of business strategy. The implementation of a company's business model into organisational 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.

The brand is a consequence of and has a symbiotic relationship with the business model since the business model determines the brand promise and the brand equity becomes a feature of the model. Managing this is a task of integrated marketing.

The standard terminology and examples of business models do not apply to most nonprofit organizations, since their sources of income are generally not the same as the beneficiaries. The term funding model is generally used instead.^[10]

[edit]See also

Wikimedia Commons has media related to: Business models

• Business model design
• Business plan
• Business process modeling
• Business reference model
• Business rule
• Competitive advantage
• Core competency
• Growth Platforms
• Market forms
• Marketing
• Marketing plan
• Strategic management
• Strategic planning
• Strategy dynamics
• Value migration
• The Design of Business

[edit]Further reading

• 'The Business Model: Theoretical Roots, Recent Developments, and Future Research', C. Zott, R. Amit, & L.Massa., WP-862, IESE, June, 2010 - revised September 2010 [http://www.iese.edu/research/pdfs/DI-0862-E.pdf]
• "Special Issue on Business Models" Long Range Planning, vol 43 April 2010, that includes 19 pieces by leading scholars on the nature of business models
• The Role of the Business Model in capturing value from Innovation: Evidence from XEROX Corporation's Technology Spinoff Companies., H. Chesbrough and R. S. Rosenbloom , Boston, Massachusetts, Harvard Business School, 2002.
• Leading the revolution., G. Hamel, Boston, Harvard Business School Press, 2000.
• Changing Business Models: Surveying the Landscape, J. Linder and S. Cantrell, Accenture Institute for Strategic Change, 2000.
• Developing Business Models for eBusiness., O. Peterovic and C. Kittl et al., International Conference on Electronic Commerce 2001, 2001.
• Place to space: Migrating to eBusiness Models., P. Weill and M. R. Vitale, Boston,Harvard Business School Press, 2001.
• Value-based Requirements Engineering - Exploring Innovative e-Commerce Ideas, J. Gordijn, Amsterdam, Vrije Universiteit, 2002.
• Internet Business Models and Strategies, A. Afuah and C. Tucci, Boston, McGraw Hill, 2003.
• 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.
• Business Model Generation, A. Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self published, 2009
• Sustaining Digital Resources: An on-the-ground view of projects today, Ithaka, November 2009. Overview of the models being deployed and analysis on the affects of income generation and cost management.

[edit]References

1. ^ ^a b c Business Model Generation, A. Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self published, 2010
2. ^ (David Teece 2010)
3. ^ (Charles Baden-Fuller and Mary Morgan, 2010)
4. ^ Michael A. Belch George E. Belch Advertising and Promotion: An Integrated Marketing Communications Perspective, 7/e., McGraw-Hill/Irwin, 2006
5. ^ JLM de la Iglesia, JEL Gayo, "Doing business by selling free services". Web 2.0: The Business Model, 2008. Springer
6. ^ The Business Model Ontology - A Proposition In A Design Science Approach
7. ^ Hummel, E., G. Slowinski, S. Matthews, and E. Gilmont. 2010. Business models for collaborative research. Research Technology Management 53 (6) 51-54.
8. ^ 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.
9. ^ Do Some Business Models Perform Better than Others?, Malone et al., May 2006
10. ^ William Foster, Peter Kim, Barbara Christiansen. Ten Nonprofit Funding Models, Stanford Social Innovation Review. 2009-03-05.