Despite all that has been said and written on business models, there is still much confusion around this poorly understood concept – up to a point where executives are torn between the euphoria with business models and losing interest completely.
Which is a shame, really, as it has been proven that business models in general, and the design of innovative business models in particular, are vital for gaining competitive advantage, improving financial performance, the commercializing of new technologies, and seizing opportunities in new markets.
The confusion stems in particular from the multitude of definitions and perspectives on the concept. The Economist once claimed that nobody really knows what strategy is; it seems the business model concept suffers a similar fate.
Intrigued by the question of what a business model is and how to use the concept in a fashion that adds value for leaders and companies, I undertook a systemic literature review, and created a database of 588 statements on the business model concept, extracted from about 200 academic and managerial publications.
I synthesized the existing literature into four core perspectives on the business model, which relate to four key questions leaders keep on asking themselves when thinking about their company’s business model. Asking these four questions will guide a clear and structured conversation and make sure you get the most out of the business model concept.
- What is our business model? – The Static Perspective
Before you can seriously start to think about your organization’s business model, you need to first of all establish a common understanding and define what a business model is. Only then can you start to discuss what your company’s business model is and might be.
A great deal of what is being said and written about business models is concerned with defining what a business model actually is. Business models are defined as frameworks for describing the way a company operates and does business, outlining the architecture or configuration of a business, its activities, processes, and the resources necessary to conduct business, and so on.
Although a large number of components can be identified in the literature, they can be grouped into a limited number of clusters based on the concepts referred to:
- Financials, revenues, profit, pricing, cost
- Resources, assets, capabilities, competencies
- Activities, processes
- Strategy, competitive advantage, differentiation, positioning
- Value proposition, benefits, solutions
- Network, partners, suppliers, ecosystem
- Customers, customer segments, target market
- Offering, products, services
- Governance, relationships, collaboration
Two approaches toward describing business model can be distinguished, based on the number of components used.
Advocates of broader definitions refer to a wide range of components and building blocks to describe what a business model is.
Sinfield and his colleagues for example, define a business model as the target customer, the customer need, the offering, how customers access the offering, the role of the company in the value chain, and the profit model of the company.
Narrower definitions, on the other hand, focus on how a company does business, concentrating on the activities it performs, how they are being performed, by whom, and the resources and capabilities necessary to perform them. (See for example: http://sloanreview.mit.edu/article/creating-value-through-business-model-innovation)
The argument in favor of the narrower definitions, focusing on the business model as your company’s activity system, is that they offer conceptual clarity, enabling you to distinguish the business model from other strategic decisions (see the strategic perspective below).
- How can we design, innovate, and change our business model? – The Dynamic Perspective
The interest in business models is driven by the success of companies like Google, Apple, Facebook, etc., and their often innovative business models. Established companies therefor ask themselves ‘How can we design such innovative models for your company?’.
Again, theoretically, two approaches can be distinguished.
The contextual approach focuses on the environment within which the process of business model innovation happens, describing attributes such as: institutional conditions, the company culture, or skills, traits and characteristics of leaders acting as key influencing factors on the business model innovation process. The process of business model innovation is perceived as being emergent, with changes happen continuously, in an evolutionary fashion, if the required environment is present.
The rational approach focuses on individuals’ and organizations’ actions, activities, and practices driving the business model innovation process. The business model innovation and change process is said to unfold in four stages:
- Identifying opportunities for business model innovation and threats to the existing business model. Activities fostering understanding include: analyzing the company, its existing business model, core capabilities, strategic assets and available technologies; exploring markets and customer needs; and evaluating the broader external environment for trends that might have an impact on the current business model.
- Developing the new business model: Business model development, specifically the question of which components to focus on, is driven largely by the definition of the business model concept authors favor, as we have seen in the static perspective.
- Evaluating business model ideas: Learning about which business model ideas hold the highest likelihood of being successful, and allowing for corrections of the business model before committing to major strategic and operational changes or financial investments. Experimentation—as an activity for testing, learning and adapting business model ideas—receives by far the most attention in the literature. The interest in experimentation is driven by the assumption that business model innovation yields a high level of uncertainty, ambiguity, and risk, making conventional planning ineffective and learning by doing a necessity. Besides generating data on which business model ideas work best, experimentation is also suggested for testing the key assumptions underlying the business model innovation.
- Implementing the business model: Before the business model can be rolled out, it needs to be adapted to handle higher volumes, and buy-in from key stakeholders needs to be obtained.
In practice, it seldom works to only focus on establishing the right culture and hope that innovative business models will emerge. Similarly, it is difficult to implement necessary activities if the organizational set up works against your innovation efforts. Hence, you will want to think about both the process and the environment in which this process is supposed to take place.
- Does our business model (old or new) create value? – The Strategic Perspective
How do you know whether or why to change your business, and whether your new model is superior to your old one? The question is whether your business model creates value, not only value for your customers, but also value for your company and the ecosystem partners it is embedded in. …
Traditionally strategic choices focus on product and market decisions. The business model offers a third dimension to consider.
The Strategy Cube illustrates these 3 dimensions.
Whereas it is possible to launch a new product or enter a new market without changing the business model, success might depend on the choice of business model. A fit between the product, market, and business model can enhance performance of your organization dramatically. Whereas some people think new business models need to be radically different to achieve competitive advantage, subtle changes can also lead to great success.
Consider the case of the consulting company Eden McCallum. Eden McCallum offers the same consulting services as BCG or McKinsey, and targets pretty much the same Fortune 500 customers, yet it operates a different business model. Whereas its activities might be similar to other consulting firms (client acquisition, staffing projects, delivering consulting projects, and so on), they are organized differently. Eden McCallum only works with freelancer consultants, for example, and the company’s partners don’t work on the projects but rather focus on client relationship management only.
To foster clarity and strategic decision-making, keep the three key choices—which customers to target; what products, services, and customer experience to offer them; and how to organize your business activities—separate from each other. Even if using a broader business model definition, you can still focus your discussion on these three choices one at a time. Keeping the discussion focused will help you make clear choices in each dimension.
- How do we manage our business model? – The Operational Perspective.
The euphoria with business model innovation has led to the unquestioned assumption that business models need to be changed, innovated and re-designed all the time. Well, once that has happened they also need to be managed. The focus of the operational perspective, which received little attention in the literature to date, is on operating, managing and controlling business models once they have been implemented, with the objective of fully exploiting the growth and profit potential of the business model. A key aspect of business model management thereby is the need for continuous improvement of performance through adjustments to make sure it still fulfills customers’ demands and delivers value to the organization. Constantly monitoring the performance of your business model is needed to know when it’s time to change and innovate it again.
Once you’ve implemented a new business model, don’t forget to track how well it serves its purpose. Make a decision on how you would like to manage it, focusing on growth or on efficiency, and track the right metrics. Be ready and willing to adjust as needed.
Asking these questions and picking your approach to answering them carefully will help to dissolve the confusion during your next discussion on your company’s business models, and enable you to get the most out of the business model concept.
How to use the four perspectives.
- Pick your definition. Settle on a definition within your company considering what we discussed above. Frameworks like the Business Model Canvas can help you to describe and visualize your business model.
- Focus the discussion. To foster clarity and strategic decision-making, keep the three key choices—which customers to target; what products, services, and customer experience to offer them; and how to organize your business activities—separate from each other. Even if using a broader business model definition, you can still focus your discussion on these three choices one at a time. Keeping the discussion focused will help you make clear choices in each dimension.
- In practice, it seldom works to only focus on establishing the right culture and hope that innovative business models will emerge. Similarly, it is difficult to implement necessary activities if the organizational set up works against your innovation efforts. Business model innovation and transformation need to well-orchestrated (more on that in another article).
- Once you’ve implemented a new business model, don’t forget to track how well it serves its purpose. Make a decision on how you would like to manage it, focusing on growth or on efficiency, and track the right metrics. Be ready and willing to adjust as needed.