Business model

A business model is an "abstract representation of an organization, either textually or graphically, of all related concepts, financial arrangements, and the core portfolio of products or services that the organization offers and will offer based on the actions necessary to achieve the goals and strategic objectives." This definition by Al-Debei indicates that the value proposition, the value architecture (organizational and technological infrastructure), financial value and network value are the primary dimensions of business models.

In theory and practice, the term business model is used for a broad set of descriptions that represent core aspects of a business, including purpose, business process, target market, offerings, strategies, infrastructure, organizational structures, business practices, operational processes and policies. The literature has offered various interpretations of business models. For example, they are often defined as designs of organizational structures to take advantage of a business opportunity. Extensions of this definition emphasize the use of consistency in the description of business models.

Business models are used to describe and classify businesses, specifically in an entrepreneurial context, but are also used within companies by managers to explore future development possibilities. Private and well-known business models can be like "recipes" for managers. Business models are also often mentioned in the context of accounting within the development of public reports.

History

Over the centuries, business models have become more sophisticated. The bait and hook model was introduced in the 20th century. This involves offering a basic product at a very low cost and then making recurring charges for similar services or top-ups. Some examples are: rake (bait) and spare parts (hook); cell phones (bait) and billable time (bait); printers (bait) and cartridges (hook); cameras (bait) and revealing (hook). A variant of this model is used by Adobe, a software developer that gives away the document reader but charges for the editor.

In the 1950s, new business models emerged with McDonald's restaurants and Toyota. In the 1960's, the innovators were Wal-Mart and Hypermarkets. In the 70's, new models emerged with FedEx and Toys R Us; in the 80's, Blockbuster, Home Depot, Intel, and Dell Computer; the 90's, with Southwest Airlines, Netflix, eBay, Amazon.com, Google, and Starbucks.

Today, business models depend on how technology is used. For example, internet entrepreneurs have created new business models that are totally dependent on emerging technologies. By using technology, businesses can reach a large number of customers at very low costs. In addition, the increased use of outsourcing and globalization has meant that business models must also seek strategic financing and move from complex supply chains to other structures.

Theoretical and empirical knowledge of business models

The logic of design and narrative coherence

The design logic sees the business model as the result of creating new organizational structures or changing existing ones to pursue new opportunities. Gerry George and Adam Bock (2011) interviewed managers to understand how they perceived the key concepts of business models. In this analysis, the authors showed that there is a design logic behind the way in which entrepreneurs and managers perceive and explain their business models. George and Bock (2012) used case studies and IBM survey data to describe how CEOs and entrepreneurs create narratives or stories in a coherent way to move businesses from one opportunity to another. They also showed that when the narrative is not coherent or the story components are not aligned, businesses tend to fail. They recommend ways in which CEO's can create strong narratives to drive change.

Business models between associated companies

Hummel et al. (2010) found that in order to choose business partners, it is important to ensure that the business models of both parties are compatible and complementary For example, they found that it is important to identify and analyze the business models of potential partners and that it is advisable to find companies that they understand our business model.

The University of Tennessee conducted research on collaborative relationships in business. The researchers coded their research in a model known as Vested or Vested Outsourcing. Vested is a hybrid in which buyers or suppliers, within an outsourcing relationship, focus on shared values and goals to create a collaboration that is mutually beneficial.

Categorization of business models

As of 2012, some researchers have studied the liquid business model.

V4 BM Scheme

Al-Debei and Avison (2010) V⁴ BM Framework - four main dimensions encapsulating 16 elements.

• Value proposal: This dimension implies that a business model should include the description of the products and services that the organization offers or will offer. In addition, you should describe the value elements incorporated in the offer, as well as the nature of the market to which it is directed.
• Architecture of value: includes technology architecture, organizational infrastructure, and its configurations.
• Value network: draws the network perspective between companies.
• Value finance: information related to costs, prices and income structure.

Switching from linear models to platform models

Sangeet Paul Choudary (2013), distinguished between two families of business models in a Wired magazine article. Choudhry contrasts the linear model with the platform model. In the first case, firms create goods or services and put them up for sale. Value is produced and consumed in a linear fashion, like water running through a pipe. The second model, of platforms, not only creates products and launches them, but also allows users to create and consume value.

Choudary, Van Alstyne and Parker, further explained how businesses are evolving from linear systems to platform systems, resulting in changing entire industries.

Business model platform

There are 3 key elements to a successful platform model. The Toolbox creates a connection that makes it easy for others to connect to the platform. This infrastructure allows interaction between participants. The magnet attracts the participants to the platform. For transaction platforms, both producers and consumers must be present. The Matchmaker fosters the flow of value through the connections between consumers and producers.

Chen (2009), established that the business model has to consider 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 airlines, traffic, transportation, hotels, restaurants, information and communication technologies, could benefit from adopting business models that embrace the capabilities of Web 2.0. He gave the example of Amazon's success, which generates huge profits through an open platform that supports other companies.

Applications

Malone et al., found that some business models performed better than others using data from top US companies from 1998 to 2002.

The concept of a business model has been incorporated into certain accounting standards. For example, the IASB uses "an entity's business model to manage financial assets" as a criterion for determining whether those assets should be measured at amortized cost or fair value in its standard of accounting for financial instruments. The Financial Accounting Standards Board, also proposed a similar use of the business model to classify financial instruments. The concept of business model has also been introduced into tax-deferred accounting under the Standards >International Financial Reporting Standards.

Business model design

Business model design refers to the activity of defining a company's model. It is part of the business development and strategy processes, and involves design methods.

Business model definitions

Economic consideration

Al-Debei and Avison (2010) consider financial value as one of the main dimensions that business models should include. With information regarding costs, methods for selecting prices and income structure. Stewart and Zhao (2000), defined the business model as "a statement of how a company will make money and maintain its revenue stream over time.’’

Consideration of components

Osterwalder et al. (2005), considered the business model as the blueprint of how a company does business. Slywotzky (1996), refers to the business model as ''the totality of how a company selects its customers, defines and differentiates its offers, defines the activities that will be carried out and those that will be subcontracted, configures its resources, creates utility for its clients and obtains income''

Strategic Result

Mayo AndyBrown (1999), considers the business model as "the design of independent key systems that create and maintain a competitive business.’’

Definitions of business model development

Zott and Amit (2009), consider business model design from both perspectives (theme design and content design). The design themes refer to the dominant drivers of value creation, and the content examines in greater detail the activities to be carried out, the linkage and the sequence in which the activities will be carried out.

Theme design with emphasis on the business model

Developing a scheme for Business Model Development, Lim (2010) proposed the ESSO model or Environment-Strategy-Structure-Operations that takes into account the alignment of the organization's strategy with organizational structure, operations and ecosystem factors in order to achieve a competitive advantage of cost, quality, time, flexibility or innovation.

Content design with emphasis on the business model

Business model design includes the modeling and description of:

• Value proposals
• Target market segments
• Distribution channels
• Customer relations
• Value configurations
• Central capacities
• Partner Network
• Cost structure
• Income model

Business model design is different from business modeling. The first refers to defining the business logic of a company at a strategic level; while the second focuses on the design of business processes at the operational level.

A business model template can facilitate the process of designing and describing a company's model.

Daas et al. (2012), developed a decision support system (DSS) for the design of business models. In their study they developed a (DSS) to help the SaaS model in this process, based on a process guided by various design methods.

Business model examples

• Model bricks and click

Model that integrates both offline and online presence. An example is when some store allows you to place orders online, but lets you collect them in your local store.

• Collective models

Business system composed of a relatively large number of businesses, traders and professionals. In this way they share resources and information that provides benefits to members. For example, a science park or a high-tech campus provides shared resources to companies and seeks to create an innovation community.

• Intermediate Removal Model

Eliminate intermediaries in the supply chain. Instead of going to traditional distribution channels, companies deal with each customer directly, for example via the internet.

• Direct sales model

Direct sales is to advertise and sell the products directly without having a fixed location. They usually have personal demonstrations or other personal arrangements. A definition is: "The direct presentation, demonstration and sale of products or services to customers, usually in their homes or workplace."

• Resell model with added value

It is a model in which a business resells some product, but with certain modifications that add value to the product or service. It is a recent collaborative model that has been adopted by software companies.

• Franchises

Franchising is the practice of using the business model of some other company. For the one who sells franchises, it is an alternative to distribute your products and expand your brand, without having to invest.

• Supply model

It is a model linked to business relationships where more participants need to work with others to succeed. It is the combination of two concepts: the contractual relationship scheme with suppliers, and the economic model used.

• Model Freemium

This model offers basic web service free of charge and charges for additional functions.

• Pay what you can (PWYC): it can be for profit or not, it is a model that does not set the prices of the goods, but asks the customer to pay what feels the product or service is worth to them. It is commonly used as a promotional tactic, depending on reciprocity and confidence in success.

Other examples of business models are:

• The subscription business model
• The bait and bait business model
• The Pyramid Scheme Business Model
• The Multilevel Marketing Business Model
• The Business Model of Network Effects
• The monopolistic business model
• The auction business model
• Electronic auction business model
• The Competence Business Model
• The loyalty business models
• The C2B model, "from consumer to business".

Business model outlines

Communities focused on technology, have defined frameworks for business modeling. These schemes attempt to define a rigorous approach to business value. It is not known with certainty how important these schemes really are for business planning. The schemes represent the central aspects of any company, they involve "how a company selects its clients, how it defines and differentiates its offers, tasks that it will develop and those that it will subcontract... it creates utility for clients and obtains profits”. A business scheme involves internal factors (market analysis; promotion of products and services; trust development; social influence) and external factors (competition and technological factors).

A review of business model frameworks can be found in Krumeich et al. (2012). Some schemes are:

• Business reference model

It is a reference model that focuses on the aspects of business architecture of a company, organization or government agency.

• Business model by components

Technique developed by IBM to model and analyze a company. It is a logical representation or a map of the components of a business or "blocs: and can be represented on a single page. It can be used to analyze the alignment of the company's strategy with the organization's capabilities and investments and to identify redundant capabilities.

• Industrialization of services model

Business model used in the strategic management and marketing of services that treats the service as an industrial process and is therefore subject to optimization procedures.

• Business model scheme

Developed by Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, the business model scheme is one of the most used schemes.

Related Concepts

The process of designing business models is part of the business strategy. Business model design and innovation refers to how a company (or network of companies) defines its business logic at a strategic level.

In contrast, companies implement their business models at the operational level through business operations. This refers to activities, processes, capabilities, functions, infrastructure, organizational structure, human resources and systems.

Consequently, an operationally viable model requires lateral alignment with business operations.

The brand is a consequence of the business model and has a symbolic relationship with it since the business model determines the mission of the brand, and the brand becomes part of the model. Managing this is a task of integrated marketing.

Standard terminology and business model examples do not apply to most nonprofits, as their sources of income are not the same. Instead, the term funds model is used.

The model is defined by the vision, mission and values of the organization as well as its boundaries. —What products are you going to offer, what customers or market are you going to address, and what supply and distribution channels are you going to use. The business model includes high-level strategy and tactical direction as well as efficient implementation. It also includes the annual objectives and goals that mark the specific steps that the organization needs to take in the coming year to achieve the expected results. All of this information is likely to be found in internal documentation and is available to internal auditors.