Business model

A business model is an “abstract representation of an 1 History

organization, be it conceptual, textual, and/or graphi-
cal, of all core interrelated architectural, co-operational, Over the years, business models have become much more
and financial arrangements designed and developed by sophisticated. The bait and hook business model (also
an organization presently and in the future, as well as all referred to as the "razor and blades business model" or
core products and/or services the organization offers, or the “tied products business model”) was introduced in the
will offer, based on these arrangements that are needed early 20th century. This involves offering a basic product
to achieve its strategic goals and objectives.”[1] [2] This at a very low cost, often at a loss (the “bait”), then charg-
definition by Al-Debei and Avison (2008) indicates that ing compensatory recurring amounts for refills or associ-
value proposition, value architecture (the organizational ated products or services (the “hook”). Examples include:
infrastructure and technological architecture that allows razor (bait) and blades (hook); cell phones (bait) and air
the movement of products, services, and information), time (hook); computer printers (bait) and ink cartridge
value finance (modeling information related to total cost refills (hook); and cameras (bait) and prints (hook). A
of ownership, pricing methods, and revenue structure), variant of this model is Adobe, a software developer that
and value network articulate the primary constructs or di- gives away its document reader free of charge but charges
mensions of business models.[3] several hundred dollars for its document writer.
A business model thus describes the rationale of how an In the 1950s, new business models came from
organization creates, delivers, and captures value,[4] in McDonald’s Restaurants and Toyota. In the 1960s,
economic, social, cultural or other contexts. The process the innovators were Wal-Mart and Hypermarkets. The
of business model construction is part of business strat- 1970s saw new business models from FedEx and Toys
egy. R Us; the 1980s from Blockbuster, Home Depot, Intel,
In theory and practice, the term business model is used and Dell Computer; the 1990s from Southwest Airlines,
for a broad range of informal and formal descriptions to Netflix, eBay, Amazon.com, and Starbucks.
represent core aspects of a business, including purpose, Today, the type of business models might depend on how
business process, target customers, offerings, strategies, technology is used. For example, entrepreneurs on the
infrastructure, organizational structures, sourcing, trad- internet have also created entirely new models that de-
ing practices, and operational processes and policies in- pend entirely on existing or emergent technology. Using
cluding culture. The literature has provided very diverse technology, businesses can reach a large number of cus-
interpretations and definitions of a business model. A tomers with minimal costs. In addition, the rise of out-
systematic review and analysis of manager responses to sourcing and globalization has meant that business mod-
a survey defines business models as the design of organi- els must also account for strategic sourcing, complex sup-
zational structures to enact a commercial opportunity.[5] ply chains and moves to collaborative, relational contract-
Further extensions to this design logic emphasize the use ing structures.[8]
of narrative or coherence in business model descriptions
as mechanisms by which entrepreneurs create extraordi-
narily successful growth firms.[6]
2 Theoretical and empirical in-
Business models are used to describe and classify busi-
nesses, especially in an entrepreneurial setting, but they sights to business models
are also used by managers inside companies to ex-
plore possibilities for future development. Well-known 2.1 Design logic and narrative coherence
business models can operate as “recipes” for creative
managers.[7] Business models are also referred to in some Design logic views the business model as an outcome of
instances within the context of accounting for purposes of creating new organizational structures or changing exist-
public reporting. ing structures to pursue a new opportunity. Gerry George
and Adam Bock (2011) conducted a comprehensive lit-
erature review and surveyed managers to understand how
they perceived the components of a business model. In
that analysis these authors show that there is a design
logic behind how entrepreneurs and managers perceive

1
2 3 CATEGORIZATION OF BUSINESS MODELS

and explain their business model. In further extensions to the nature of targeted market segment(s) along with
the design logic, George and Bock (2012) use case stud- their preferences.
ies and the IBM survey data on business models in large
companies, to describe how CEOs and entrepreneurs cre- • Value Architecture: portrays the concept as a
ate narratives or stories in a coherent manner to move the holistic structural design of an organization, includ-
business from one opportunity to another. They also show ing its technological architecture, organizational in-
that when the narrative is incoherent or the components frastructure, and their configurations.
of the story are misaligned, that these businesses tend to
fail. They recommend ways in which the entrepreneur or
CEO can create strong narratives for change. • Value Network: depicts the cross-company or
inter-organization perspective towards the concept
and has gained much attention in the BM literature.
2.2 Complementarities of business models
between partnering firms • Value Finance: depicts information related to cost-
ing, pricing methods, and revenue structure
Studying collaborative research and the accessing of ex-
ternal sources of technology, Hummel et al. (2010)
found that in deciding on business partners, it is impor-
3.2 Shift from pipes to platforms
tant to make sure that both parties’ business models are
Sangeet Paul Choudary (2013) distinguishes between two
complementary.[9] For example, they found that it was
broad families of business models in an article in Wired
important to identify the value drivers of potential part-
magazine.[14] Choudary contrasts pipes (linear business
ners by analyzing their business models, and that it is ben-
models) with platforms (networked business models). In
eficial to find partner firms that understand key aspects of
the case of pipes, firms create good and services, push
our own firm’s business model.[10]
them out and sell them to customers. Value is produced
The University of Tennessee conducted research into upstream and consumed downstream. There is a linear
highly collaborative business relationships. Researchers flow, much like water flowing through a pipe. Unlike
codified their research into a sourcing business model pipes, platforms do not just create and push stuff out.
known as Vested (also referred to as Vested Outsourc- They allow users to create and consume value.
ing). Vested is a hybrid sourcing business model in which
In an op-ed on MarketWatch,[15] Choudary, Van Alstyne
buyers and suppliers in an outsourcing or business rela-
and Parker further explain how business models are mov-
tionship focus on shared values and goals to create an ar-
ing from pipes to platforms, leading to disruption of en-
rangement that is highly collaborative and mutually ben-
tire industries.
eficial to each.[11]

3.3 Platform business models

3 Categorization of business mod-
In an earlier article [16] Choudary elaborates on the three
els elements of a successful platform business model. The
Toolbox creates connection by making it easy for others
From about 2012, some research and experimenta- to plug into the platform. This infrastructure enables in-
tion has theorized about a so-called “liquid business teractions between participants. The Magnet creates pull
model”.[12][13] 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
3.1 V4 BM framework of value by making connections between producers and
consumers. Data is at the heart of successful matchmak-
Al-Debei and Avison (2010) V4 BM Framework - four ing, and distinguishes platforms from other business mod-
main dimensions encapsulating sixteen elements: Value els.
Proposition, Value Architecture, Value Network, and
Chen (2009) stated that the business model has to
Value Finance[3]
take into account the capabilities of Web 2.0, such as
collective intelligence, network effects, user-generated
• Value Proposition: This dimension implies that content, and the possibility of self-improving systems.
a BM should include a description of the prod- He suggested that the service industry such as the airline,
ucts/services a digital organization offers, or will of- traffic, transportation, hotel, restaurant, information and
fer, along with their related information. Further- communications technology and online gaming industries
more, the BM needs also to describe the value el- will be able to benefit in adopting business models that
ements incorporated within the offering, as well as take into account the characteristics of Web 2.0. He also
 3

emphasized that Business Model 2.0 has to take into ac-
count not just the technology effect of Web 2.0 but also
the networking effect. He gave the example of the suc-
cess story of Amazon in making huge revenues each year
by developing an open platform that supports a commu-
nity of companies that re-use Amazon’s on-demand com-
merce services.[17]
5 Business model design
Business model design refers to the activity of designing
a company’s business model. It is part of the business
development and business strategy process and involves
design methods.

5.1 Definitions of business model

4 Applications
Malone et al.[18] found that some business models, as de-
fined 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.
Al-Debei and Avison (2010) define a business model
as an abstract representation of an organization. This
may be conceptual, textual, and/or graphical, of all core
interrelated architectural, co-operational, and financial
arrangements designed and developed by an organiza-
tion presently and in the future, as well all core prod-
ucts and/or services the organization offers, or will offer,
based on these arrangements that are needed to achieve its
strategic goals and objectives.[1] This definition indicates
that value proposition, value architecture, value finance,
and value network articulate the primary constructs or di-
mensions of business models.[3]

In the context of the Software-Cluster, which is funded by

the German Federal Ministry of Education and Research, 5.1.1 Economic consideration
a business model wizard for software companies has been
developed. It supports the design and analysis of software Al-Debei and Avison (2010) consider value finance as
business models. The tool’s underlying concept and data one of the main dimensions of BM which depicts infor-
were published in various scientific publications. mation related to costing, pricing methods, and revenue
structure. Stewart and Zhao (2000) defined the business
The concept of a business model has been incorporated model as ‘‘a statement of how a firm will make money and
into certain accounting standards. For example, the sustain its profit stream over time.’’ [35]
International Accounting Standards Board (IASB) uti-
lizes an “entity’s business model for managing the finan-
cial assets” as a criterion for determining whether such 5.1.2 Component consideration
assets should be measured at amortized cost or at fair
value in its financial instruments accounting standard, Osterwalder et al. (2005) consider the Business Model
IFRS 9.[19][20][21][22] In their 2013 proposal for account- as the blueprint of how a company does business.[36] Sly-
ing for financial instruments, the Financial Accounting wotzky (1996) regards the business model as ‘‘the totality
Standards Board also proposed a similar use of busi- of how a company selects its customers, defines and dif-
ness model for classifying financial instruments.[23] The ferentiates it offerings, defines the tasks it will perform
concept of business model has also been introduced into itself and those it will outsource, configures its resources,
the accounting of deferred taxes under International Fi- goes to market, creates utility for customers and captures
nancial Reporting Standards with 2010 amendments to profits.’’ [37]
IAS 12 addressing deferred taxes related to investment
property.[24][25][26]
5.1.3 Strategic outcome
Both IASB and FASB have proposed using the con-
cept of business model in the context of reporting a Mayo and Brown (1999) considered the business model
lessor’s lease income and lease expense within their joint as ‘‘the design of key interdependent systems that create
project on accounting for leases.[27][28][29][30][31] The con- and sustain a competitive business.’’ [38]
cept has also been proposed as an approach for determin-
ing the measurement and classification when accounting
for insurance contracts.[32][33] As a result of the increasing 6 Definitions of business model de-
prominence the concept of business model has received
in the context of financial reporting, the European Finan- sign or development
cial Reporting Advisory Group (EFRAG), which advises
the European Union on endorsement of financial report- Zott and Amit (2009) consider business model design
ing standards, commenced a project on the “Role of the from the perspectives of design themes and design con-
Business Model in Financial Reporting” in 2011.[34] tent. Design themes refer to the system’s dominant value
4 7 EXAMPLES OF BUSINESS MODELS

creation drivers and design content examines in greater Business model design is distinct from business model-
detail the activities to be performed, the linking and ing. The former refers to defining the business logic of a
sequencing of the activities and who will perform the company at the strategic level, whereas the latter refers to
activities.[39] business process design at the operational level.
A business model design template can facilitate the pro-
6.1 Design themes emphasis of business cess of designing and describing a company’s business
model.
model
Daas et al. (2012) developed a decision support system
(DSS) for business model design. In their study a decision
Environment-Strategy-Structure-Operations (ESSO) Business Model Development
(copyright: Dr. Michael Lim 2010)
support system (DSS) is developed to help SaaS in this
PESTEL and Opportunities and Threats
process, based on a design approach consisting of a design
Environment
process that is guided by various design methods.[41]
- How do they affect us and our Customers,
Competitors & Suppliers

Operations Operational
Competitive priorities Strategy
•Key activities •Cost
•Key resources •Quality Market opportunities
•Key competitors •Time Competitive advantage
•Key suppliers and partners •Flexibility Resource based view
•Key customers- segment, channel •Innovation

7 Examples of business models

Market access e.g. government contracts
(e.g. direct, franchise) •Affective Customer base– broad or narrow/ focused/ niche
•Cost and Revenue
Knowledge Management
•Knowledge in people’s heads
•Documents, Databases and Resource Planning Programs
•Strategy, Structure and Operations

Structure In the early history of business models it was very typ-

•Hierarchy
•Community (flat)
•Mixed
ical to define business model types such as bricks-and-
Design Copyright: Dr. Michael Lim (2010)

Lim, M. 2010. Environment-Strategy-Structure-Operations (ESSO) Business Model. Knowledge Management Module at Bangor University, Wales. Available at:
mortar or e-broker. However, these types usually de-
scribe only one aspect of the business (most often the rev-
http://www.communitiesofinnovation.com/L/Dr_Michael_Lim_%20Business_Model_Knowledge_Creation_and_Innovation_Lecture%209.ppt
(last accessed 02/12/10)

enue model). Therefore, more recent literature on busi-

Environment-Strategy-Structure-Operations (ESSO) Business
Model Development
The following examples provide an overview for various
Developing a Framework for Business Model Devel- business model types that have been in discussion since
opment with an emphasis on Design Themes, Lim the invention of term business model:
(2010) proposed the Environment-Strategy-Structure-
Operations (ESSO) Business Model Development which
takes into consideration the alignment of the organiza-
tion’s strategy with the organization’s structure, opera-
tions, and the environmental factors in achieving compet-
itive advantage in varying combination of cost, quality,
time, flexibility, innovation and affective.[40]
6.2 Design content emphasis of business
model design
Business model design includes the modeling and de-
scription of a company’s:
• value propositions
• target customer segments
• distribution channels
• customer relationships
• value configurations
• core capabilities
ness models concentrate on describing a business model
as a whole, instead of only the most visible aspects.
• Bricks and clicks business model
Business model by which a company integrates
both offline (bricks) and online (clicks) pres-
ences. 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 system, 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. For exam-
ple, a science park or high-tech campus pro-
vides shared resources (e.g. cleanrooms and
other lab facilities) to the firms located on its
premises, and in addition seeks to create an
innovation community among these firms and
their employees.[42]

• partner network • Cutting out the middleman model

• cost structure
The removal of intermediaries in a supply
• revenue model 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), com-
panies may now deal with every customer di-
rectly, for example via the Internet.
• Direct sales model
Direct selling is marketing and selling products
to consumers directly, away from a fixed re-
tail 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 pre-
sentation, demonstration, and sale of prod-
ucts and services to consumers, usually in their
homes or at their jobs.”[43]
• Distribution business models, various
• Value-added reseller model
Value Added Reseller is a model where a busi-
ness makes something which is resold by other
businesses but with modifications which add
value to the original product or service. These
modifications or additions are mostly industry
specific in nature and are essential for the dis-
tribution. Businesses going for a VAR model
have to develop a VAR network. It is one of
the latest collaborative business models which
can help in faster development cycles and is
adopted by many Technology companies espe-
cially software.
• 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 fran-
chisor, the franchise is an alternative to build-
ing 'chain stores’ to distribute goods and avoid
investment and liability over a chain. The
franchisor’s success is the success of the fran-
chisees. The franchisee is said to have a greater
incentive than a direct employee because he or
she has a direct stake in the business.
• Sourcing business model
A Sourcing Business Model is a type of busi-
ness model that is applied specifically to busi-
ness relationships where more than one party
5
needs to work with another party to be suc-
cessful. It is the combination of two concepts:
the contractual relationship framework a com-
pany uses with its supplier (transactional, re-
lational, investment based), and the economic
model used (transactional, output or outcome-
based).
• 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.[44]
• Pay what you can (PWYC) is a non-profit or for-
profit business model which does not depend on set
prices for its goods, but instead asks customers to
pay what they feel the product or service is worth
to them.[45][46][47] It is often used as a promotional
tactic,[48] but can also be the regular method of do-
ing business. It is a variation on the gift econ-
omy and cross-subsidization, in that it depends on
reciprocity and trust to succeed.
"Pay what you want" (PWYW) is sometimes used syn-
onymously, but “pay what you can” is often more oriented
to charity or socially oriented uses, based more on ability
to pay, while “pay what you want” is often more broadly
oriented to perceived value in combination with willing-
ness and ability to pay.
Other examples of business models are:
• Auction business model
• All-in-one business model
• Chemical Leasing
• 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
• Online media cooperative
• Premium business model
• Professional open-source model
• Pyramid scheme business model
• Razor and blades business model
• Servitization of products business model
• Subscription business model
6 9 RELATED CONCEPTS
8 Business model frameworks
Technology centric communities have defined “frame-
works” for business modeling. These frameworks at-
tempt to define a rigorous approach to defining business
value streams. It is not clear, however, to what extent such
frameworks are actually important for business planning.
Business model frameworks represent the core aspect of
any company; they involve “the totality of how a com-
pany selects its customers defines and differentiates its
offerings, defines the tasks it will perform itself and those
it will outsource, configures its resource, goes to mar-
ket, creates utility for customers, and captures profits”.[49]
A business framework involves internal factors (market
analysis; products/services promotion; development of
trust; social influence and knowledge sharing) and exter-
nal factors (competitors and technological aspects).[50] A
state of the art review on business model frameworks can
be found in Krumeich et al. (2012).[51] In the following
some frameworks are introduced.
• Bm2 - Business Model Body Of Knowledge
Body Of Knowledge (BOK) for Business Mod-
els. Developed by Stephane Rogeau (2015) [52]
• [[V⁴ Business Model Framework]]
Developed by Al-Debei and Avison (2010)
• Business reference model
Business reference model is a reference model,
concentrating on the architectural aspects of
the core business of an enterprise, service or-
ganization or government agency.
• Component business model
Technique developed by IBM to model and an-
alyze an enterprise. It is a logical representa-
tion or map of business components or “build-
ing blocks” and can be depicted on a single
page. It can be used to analyze the alignment of
enterprise strategy with the organization’s ca-
pabilities and investments, identify redundant
or overlapping business capabilities, etc.
• Industrialization of services business model
Business model used in strategic management
and services marketing that treats service pro-
vision as an industrial process, subject to in-
dustrial optimization procedures
• Business Model Canvas
Although Webvan failed in its goal of disintermediating the North
American supermarket industry, several supermarket chains (like
Safeway Inc.) have launched their own delivery services to target
the niche market to which Webvan catered.
Developed by A. Osterwalder, Yves Pigneur,
Alan Smith, and 470 practitioners from 45
countries, the business model canvas [4][53] is
one of the most used frameworks for describ-
ing the elements of business models.
9 Related concepts
The process of business model design is part of business
strategy. Business model design and innovation refer to
the way a firm (or a network of firms) defines its business
logic at the strategic level.
In contrast, firms implement their business model at the
operational level, through their business operations. This
refers to their process-level activities, capabilities, func-
tions and infrastructure (for example, their business pro-
cesses and business process modeling), their organisa-
tional structures (e.g. organigrams, workflows, human
resources) and systems (e.g. information technology ar-
chitecture, production lines).
Consequently, an operationally viable and feasible busi-
ness model requires lateral alignment with the underlining
business operations.[54]
The brand is a consequence of the business model and
has a symbiotic relationship with it, because the business
model determines the brand promise, and the brand eq-
uity becomes a feature of the model. Managing this is a
task of integrated marketing.
The standard terminology and examples of business mod-
els 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.[55]
 7

10 See also [6] George,G and Bock AJ. 2012. Models of opportunity:
How entrepreneurs design firms to achieve the unex-
pected. Cambridge University Press, ISBN 978-0-521-
• Business plan
17084-0
• Business process modeling
[7] Baden-Fuller, Charles; Mary S. Morgan (2010). “Busi-
ness Models as Models”. Long Rang Planning 43 (2/3):
• Business reference model
156–171.
• Business rule
[8] Unpacking Sourcing Business Models: 21st Century Solu-
tions for Sourcing Services, The University of Tennessee,
• Competitive advantage
2014
• Core competency
[9] Karl M. Popp and Ralf Meyer (2010). Profit from Soft-
• Growth platforms ware Ecosystems: Business Models, Ecosystems and Part-
nerships in the Software Industry. Norderstedt, Germany:
• Market forms BOD. ISBN 3-8391-6983-6.

• Marketing [10] Hummel, E., G. Slowinski, S. Matthews, and E. Gilmont.

2010. Business models for collaborative research. Re-
• Marketing plan search Technology Management 53 (6) 51-54.

• Strategic management [11] Vitasek, Kate. Vested Outsourcing: Five Rules that will
Transform Outsourcing” (New York: Palgrave Macmil-
• Strategy Markup Language lan, 2012) ISBN 978-1-137-29719-8

• Strategic planning [12] Pedersen, Kristian Bonde; Svarre, Kristoffer Rose; Slep-
niov, Dmitrij; Lindgren, Peter. “Global Business Model –
• Strategy dynamics a step into a liquid business model” (PDF).

• Value migration [13] Henning, Dietmar (2012-02-11). “IBM launches new

• The Design of Business
• Enterprise Architecture
• Business Model Canvas
• Component business model
11 References
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[2] Strategy markup language (StratML) -- Part 1: StratML
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[3] Al-Debei, M. M., & Avison, D. (2010). Developing a uni-
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[4] Business Model Generation, Alexander Osterwalder, Yves
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[5] George,G and Bock AJ. 2011. The business model
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111
form of day-wage labour”. World Socialist Web Site. In-
ternational Committee of the Fourth International (ICFI).
Retrieved 2015-02-24. The “liquid” model now being
pursued is not limited to IBM. [...] It is no accident that
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[14] Why Business Models fail: Pipes vs. Platforms, Sangeet
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[15] What Twitter knows that Blackberry didn't, Choudary, Van
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[18] Do Some Business Models Perform Better than Others?,
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8 11
[20] “The beginning of the end for IAS 39 - Issue of IFRS 9 re-
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for Strategic Change, 2000.
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K. F. Saghaug, “Towards a new generation of busi-
ness model innovation model”, presented at the 12th
International CINet Conference: Practicing innova-
tion in times of discontinuity, Aarhus, Denmark, 10-
13 September 2011
10 14 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

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