Business Models

November, 2015

Definition of a Business Model

The Business Model Canvas

In the early chapters of Business Model Generation, Osterwalder and Pigneur (2010) sought to establish a common vocabulary and grammar that would support the analysis, design, and evaluation of business models. They accomplished this by sharing the Business Model Canvas—a visual, structured approach to thinking about how a business satisfies customers’ needs while generating profit for its owners.

According to Osterwalder and Pigneur (2010), at its most basic level, a business model consists of the interaction of four elements: (a) the customers that a business serves, (b) the value that the business offers, (c) the infrastructure that allows the business to deliver this value, and (d) the economic exchanges that must occur in order for the business to be successful. Whereas a business strategy has a critical theoretical dimension, a business model carries the strategy fully into the realm of the practical.

Scholarly Perspectives on Business Models

The Encyclopedia of Management defined a business model as “the framework of production and market approaches designed, developed, and implemented by the business organization with the objective of generating continuous streams of revenue through an established position of competitive advantage in a given industry” (“Business Model,” 2012, p. 87). This definition explicitly included firm activities (production), engagement with customers (market), and profitability (revenue). Additionally, it implied that the firm offers a differentiated value proposition (competitive advantage).

A casual reader might be inclined to assume that the concept of the business model is a matter of substantial consensus, and thus that any given definition is essentially interchangeable with another. However, Zott, Amit, and Massa’s (2011) review of the business model literature suggested otherwise. The following bullets summarize some of their findings:

  • Having emerged in the mid-1990s, the business model concept has yet to come to maturity.
  • Business models have attracted attention within three distinct subject specializations. Researchers have generally engaged each other within, rather than across, these silos.
  • When referring to business models, scholars have often failed to define what they mean by the term or to interact with others’ definitions.
  • The business model is gaining broad acknowledgment as a worthwhile subject of analysis within business research.

Zott et al.’s (2011) analysis provides a helpful reminder that terms used in business are not always grounded in empirical research. Often they are simply theoretical constructs whose limitations, parameters, or assumptions are not articulated clearly. This informality does not render them useless, but it does call for critical thinking.

Value Propositions in Business Models

The concept of value proposition, as defined by Kotler and Keller (2006), is simply “the whole cluster of benefits the company promises to deliver” (p. 143). Value propositions are associated with business models as construed by scholars specializing in e-business, strategy, and innovation/technology management (Zott et al., 2011). They occupy the central position in the Business Model Canvas, naturally connected with the interests of the customer segment(s) as well as with the resources and activities of the firm (Osterwalder & Pigneur, 2010).

According to the Encyclopedia of Management, “Value proposition involves identifying the specific needs of the target market and designing products that are tailored to meet the specific needs” (“Business Model,” 2012, p. 87). Sources of customer value can include, for example, innovation, performance, customization, design, price, and convenience (Osterwalder & Pigneur, 2010). Business models are fundamentally about delivering products and services that customers find more valuable than competitors’ offerings, and then capturing some of the value in the form of profit.

Brainstorming New Business Models

Brainstorming is widely used to induce creativity in business analysis and planning (Meredith & Shafer, 2013). Rothaermel (2013) advocated for the use of scenario planning, including “what if” questions, for the purpose of anticipating possible futures and responding to them with appropriate strategies. In business model development, creative ideation techniques are needed in order to free planners from the constraints of the status quo. Brainstorming constitutes a conscientious effort to think beyond the current business model, and to envision how changing particular aspects of reality can yield attractive business opportunities (Osterwalder & Pigneur, 2010).

It is worth mentioning that using brainstorming effectively can be more difficult than it seems. Therefore, a good facilitator will be prepared to address potential pitfalls with appropriate countermeasures (Meredith & Shafer, 2013). At its best, brainstorming can lead to revolutionary changes in the way that a firm approaches satisfying the needs of its target market(s). It can also lead to relatively simple adjustments that can enhance or extend the viability of existing business models. Examples of new business models born out of unconstrained thinking include (a) Rolls-Royce offering jet engines on the basis of hours of operation; (b) Grameenphone blanketing rural Bangladesh with cell phones; and (c) soft drink companies enabling consumers to mix sodas in their own homes (Osterwalder & Pigneur, 2010; Freisinger, 2011).

References

Business model. (2012). In S. D. Hill (Ed.), Encyclopedia of management (7th ed., pp. 87–89). Detroit: Gale. Retrieved from http://go.galegroup.com.ezproxy.liberty.edu:2048/ps/i.do?id=GALE%7CCX4016600039&v=2.1&u=vic_liberty&it=r&p=GVRL&sw=w &asid=83fdf51d079923d93dd9d0767376ada6

Freisinger, J. (2011, November). Brainstorming with SCAMPER. Innovation: America’s Journal of Technology Commercialization, 9(5). Retrieved from http://www.innovation-america.org/brainstorming-scamper

Kotler, P., & Keller, K. L. (2006). Marketing management (12th ed.). New Delhi: Prentice-Hall of India.

Meredith, J. R., & Shafer, S. M. (2013). Operations management for MBAs (5th ed.). Hoboken, NJ: Wiley.

Osterwalder, A., & Pigneur, Y. (2010). Business model generation: A handbook for visionaries, game changes, and challengers. Hoboken, NJ: Wiley.

Rothaermel, F. T. (2013). Strategic management: Concepts & cases. New York: McGraw-Hill/Irwin.

Zott, C., Amit, R., & Massa, L. (2011). The business model: Recent developments and future research. Journal of Management, 37(4), 1019–1042. doi:10.1177/0149206311406265

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