Concept and evolution of

business models

Presented By
Mohit Sharma
09FT-088
Harvard Business Review
(2001) point out:
`”But what exactly is a `business
model', anyway? No one ever defined
the term precisely ± it seemed to
mean either `what we do' or `how we
hope to make money someday' ± but it
always got tossed into conversations
about
 business model' is widely
used in the business world
• The academic research on
this issue is sparse and has
not yet systematically
addressed this topic.
• No theory developed that
deals with the relevant
features of this concept.
• Business models in
combination with the
deconstruction phenomenon
Existing theory: A brief review

Deconstruction phenomenon
• Deconstruction refers to splitting up the value chain and redistributing the parts of the value
chain to different players in the corresponding field.

• The value chain concept can also be applied on the industry level and not only on the firm
level .

• what activities should be performed in the traditional industry setting and 2. how are the
players in the industry able to Create competitive advantage and add value to the specific
industry value Chain

• A prerequisite for successfully entering or opening up markets are strong appropriability

regimes focuses on the configuration of the
value chain and it does not ask what the specific revenue model should look like.
Scholars
• Refer to the architectural configuration of the
Amit and Zott (2001)
components of transactions as the core of business
models, meaning the specific information, service, or
product
• Favours the other extreme in applying a spectrum of
Hamel (2000)
modules to form the business model, including
customer interface, core strategy, strategic re-sources
and value network.
Mahadevan (2000)
• Developed a framework for the understanding of
business models in the internet context and has
identified three elements of business model, which
include the value stream for the business partners and
the buyers,
Venkatraman and • Business model as a co-ordinated plan to design
Henderson (1998) strategy along three vectors (customer interaction,
asset configuration, knowledge leverage)
 Dimensions of business models
First, the value chain is a low/activity concept
which centres on the low of products through
an organisation, whereas the business model
focuses on the different steps that are
Examples
performed in order to complete a certain task. • Powell, Koput and Smith-Doerr (1996)
• the notion of a business model puts emphasis found that the locus of innovation in the
on the relationships biotechnology industry was the network
(such as licensing agreements, strategic and not the individual ®rm. These
alliances, or joint ventures) between `appropriability regimes' can either be
different companies established based on `external' legal
• Third, the question of how to generate revenue protection or the inherent inimitability of
needs to be addressed Sometimes a business specific `internal' products, processes, or
model is just analysed in terms of or referred knowledge
to as being some kind of a revenue model .
• Fourth, the concept of business model that is
developed in this paper builds on the resource
based view (e.g. Barney, 1991; Leonard-Barton,
1992;Prahalad and Hamel, 1990) as an
underlying analytical perspective, because the
transaction cost theory (Williamson, 1975) is
not sufficient in explaining the rise of business
models.
Fourth Concept
• In order to succeed in a deconstructing world, transaction costs are not the prime
decision criterion.
• it is necessary to identify and develop resources and capabilities crucial to the
creation of sustained competitive advantage .
• In a first step, one can conclude that the value embedded in the considered
business model increases as the bundle of resources and capabilities it comprises
becomes more and more difficult to imitate, less transferable and more
complementary.
• In a second step, the existing kind of capability or core Dimensions of business
models
Journal of General Management Vol. 31 No. 2 Winter 2005 Concept and evolution
of business models competence defines not only the value of the business model,
but it allows us to decide what kind of business model is best suited for a given
competitive situation of a company and whether it is necessary to reconsider the
current business model..
 In order to understand the construct of `business model' of a
company the following questions should be addressed

• How is the value chain of the company configured with

respect to the considered industry value chain?

• Where does the competitive advantage (market power) of the

company come from?

• How does the company generate revenues (what is the

revenue model?) and what is the existing revenue potential?
 Configuration of business models
• (Heuskel, 1999) • kinds of value chain constellation to
compete in the marketplace.
E.g .Exxon Mobile .
• (Ghemawat, 1991).
• Threat Crested By Radical Innovating but
(Hannan and Freeman, 1984 there recognit.ion is slow
Utterback,1994). • If one step of the value chain is better
performed by the market and does not
belong to the core competencies of the
company, the consequence will be an
outsourcing of the respective step
Orchestrator • the co-ordinator of activities in a network
of suppliers, still active in the complete
industry value chain and participating in
Its high revenue potential.
e.g :-Nike or Adidas
 Dynamic perspective of business models

•
• Tushman and Anderson, Companies may face the immediate need
to change and adopt their business
1986;Utterback, 1994 •
models in order to remain competitive.
A successful commercialisation of the
innovation may depend on a bottleneck
asset in the hands of a few suppliers

• Applying this strategy implies that the

• Innovator is limited to the revenue

potential that exists within

• This specific step of the industry value

chain, whereas covering more steps of the
value chain would deliver a greater
revenue potential
 why should innovators change their
business models?
• when imitation is easy and markets do not work well, the profit from innovation may accrue
to the owner of certain complementary assets.

• The innovator may in certain cases need to establish a position in the complementary assets

• Integrate complementary assets is very expensive and the variety of necessary

assets and competencies is probably quite large.
• In industries with rapid technological change, technologies progress so quickly that it is
unlikely that a single company has the full range of expertise needed to bring the products to
market in a timely manner.

• Apart from that, the innovator has the possibility to access all necessary complementary
assets through contractual relationships, resulting in a move from the Layer Player or Market
Maker model .
Summing up
• The competitive situation changes either due to internal(desire for greater revenues or
company growth) or external (competence-destroying technologies) drivers.

• A direct development from the Layer Player or Market Maker to the Integrated model
promises the highest revenue potential, but bears also enormous risk as well as costs

• A development from the Layer Player or Market Maker to the Orchestrator model promises
high revenue potential with a significant lesser risk and costs and, therefore, is more likely to
happen
• the roles and different strategic moves of the innovators, it is also important to look at the
strategy of the industry incumbent,

• The Integrator is in the most desirable position as he has access to all necessary
complementary assets and has a high revenue potential, due to the fact that he covers the
complete industry value chain.

• (Abernathy and Clark, 1985;
Tushman and Anderson, 1986)
• Mitchell (1989)
• Hill and Rothaermel (2003)
• The exploding knowledge makes it difficult
for one single company to master
• The relevant knowledge and capabilities,
the position of the industry
• Incumbent may be in severe danger,
because he faces the risk that his
technology as well as his business model
may be outdated.
• Shows that an incumbent is likely to enter
a new subfield if the FIrm's core products
are threatened
• To realise this, large incumbents often
engage in collaborative agreements with
small, innovative and high tech-orientated
companies in order to get access to the
new emerging knowledge
Discussion and conclusions
• It is necessary to consider how individual firms change in defining their role in the industry
value chain system.
• In most sectors, sustaining competitive advantage requires dynamic cap-abilities as well as
knowledge assets.
• Dynamic capability can be considered as the ability to seize new opportunities and to change
the existing business model by recognising the value chain constellation and protecting
knowledge assets, competences and (the access to) complementary assets and technologies
in order to achieve.

First, the Layer Player as well as the Market Maker model can be very profitable for a
few companies in a specific industry, but bears also enormous risks.

 As long as the companies operating in this field are at the leading edge of technology,
they are able to make profit. But, if one day their technology becomes obsolete because
of another competence-destroying technology
As company Point of view.
•
• From an internal point
of view
• From an external point • This provides the company with useful
of view
Companies are able to identify
successful business models and
transfer them to other parts of the
company. Moreover, by analysing the
dynamics of business models in a
certain industry context the company
is able to see whether a change in the
business model is required or not
information about the strategy of their
competitors and allows identifying
(new) business models
that might be superior to their own
business model initiating a change in
the company's business model
 Finally
• Consider a change in their applied business models which leads to the second major
conclusion: the Orchestrator model .

business model with the greatest potential in the long run.

it provides a high total revenue potential by participating in various steps of
the value chain .
The Orchestrator model has the highest probability of becoming the
dominant
design in terms of business models.
Lead to more outsourcing. In core areas too.

The rationale :-
this may lie in risk sharing, obtaining access to new markets and
technologies, or speeding products to market (Eisenhardt and
Schoonhoven, 1996; Hage-dorn, 1993; Kogut, 1989).
Thank You 