43/2-3 April/May 2010
This Special Issue on Business Models will include the following articles:
Business Model foundations: Definitions and Approaches
Business Models as Models
If business models are models - what, in fact, are models? The authors draw evidence from philosophy, economics and biology to discuss a wide range of models – scale models, role models, ‘nutshell’ models, exemplars and ideal types – to show how science uses models in its enquiries. They discuss the business model concept’s role in simply enabling categorisation – via taxonomies (bottom-up from real world examples) and typologies (top-down from theory) and also the difference between the notion of representative of and representative for – how the ‘standardized lab. mouse’ is representative of all mice, but also for thewider group of mammals, just as McDonalds is both a model of - and the model for - business format franchising. Thus business models take on the role-model/exemplar/ideal type mantle – and it’s no wonder iconic business are often labelled simply with the name of their most successful business incarnation.
But business models also act as laboratories themselves, where academics explore how they work and manager’s experiment with the destiny of their firms – even with the structure of the model itself: unusual laboratories, where they are also factors in their own study. Business models as sites to try out change and innovation brings the authors to their final contribution – the notion of the business model as a recipe, building on tacit managerial skills to demonstrate or advise these ‘chefs’ about how best to organise and integrate their ingredients and techniques ‘so that the results will come out right’. But this analogy doesn’t just see a recipe as a principle/template to be followed, but also establishes the ‘kitchen’ as the site of managerial experiments to modify traditional models, or to innovate completely new business ‘dishes’.
Business Models, Business Strategy and Innovation
What do customers really want? How can a firm get paid (and profit) from meeting their needs when the modern world has shifted the balance of power between customer and supplier? Explicit or implicit, any business venture uses a business model that crystallizes its understanding of ‘deep truths’ about customer needs and ability to pay, and describes the architecture of its value creation, delivery and capture mechanisms, and is not abstract, but rooted in specific context. He notes how the concept lacks theoretical grounding in either business or economics literature: the latter simply assumes that markets exist for everything - producers will supply, customers will buy and prices will resolve everything, so business model design is simply unnecessary. But, in fact, he argues business models ‘have considerable significance but are poorly understood - frequently mentioned but rarely analysed’ and establishes his goal ‘to explore their connections to business strategy, innovation management and economic theory.’
Despite the increasing contemporary attention and innovatory energy they attract, business models are anything but an Internet-age issue. The author offers some fascinating historical examples of innovation, from meat packing in the 1880s to containerisation in the 1950s, via commercial jet engines and sports sponsorship, as well as more well-known and modern models - razor blades, ‘no-frills’ airlines, music downloads, freemium and open source software, web 2.0 etc. etc…… He notes how often technology changes have presaged business model innovation, quoting horse > railroad > automobile > airplane and town crier > newspaper > Internet as recurring patterns of models successively complementing and displacing each other. But even well-established firms and iconic inventors can make major mistakes: EMI and Xerox got the CAT scanner and the PC wrong, while the cotton gin inventor Eli Whitney died poor, and even Thomas Edison, with 1000+ patents to his name, got the light bulb right, but mishandled the commercialisation of his phonograph technology.
A model may not be new (think Sears/Dell, newspapers/Google), nor the technology - Dell didn’t invent computers nor Sam Walton discount stores. But good design can establish difficult to replicate advantages, as when Wal-Mart built stores in towns too small to support a like competitor. Using strategy analysis to establish such advantages can create barriers to imitation, and the author recounts the Netflix/Blockbuster battle in detail to exemplify the learning and adaptations involved in finding and fine-tuning a successful business model.
This substantial article offers a wide ranging view of the field, wherein the author examines the relationship between business models and strategy, as well as scientific innovation/public good and value capture issues. In the intellectual property field, he notes the traditional model of embedding it into products, the licensing alternative, and the more common (but more difficult to manage) hybrid approaches. But, in particular, he notes the importance of technological creativity being matched by business model innovation. Good business model design is partly an ‘art’, involving distilling ‘deep truths’ about customer desires, and understanding the likely futures of costs and competitor capabilities, and of technological and organizational trajectories. There will always be considerable trial and error - being fast to learn and adjust is important. But while business model innovation ‘may seem less heroic to many citizens’, without it, technological innovation may yield no value to the inventor - or to society at large.
From Strategy to Business Models and on to Tactics
Q: When is a strategy not a strategy? A: When it’s a business model....... This article establishes its definition of the difference by saying that a firm’s strategy primarily involves choosing its business model – the design of which defines the value creation and capture logics specific to the firm. In stable competitive environments there may be a one-on-one mapping of the two, which can make differentiating them difficult - but when external contingencies force the strategy to choose a new business model, the two concepts can be clearly seen to differ.
And choices have consequences – the choice of business model dictates how much room for manoeuvre is left in terms of the tactics of its operation. In developing their theme, the authors show how business models can lead to virtuous (or vicious) circles; how the tactics of firms in the same market get entangled in interactions, so that the tactics of one have outcomes for the other; and how both business models and their interactions can be represented by complex causal loop diagrams linking choices to consequences and actions to outcomes. All these are discussed through examples ranging from Ryanair’s choice not to be a feeder airline, through a ‘mom’n’pop’ store struggling to compete with a discount multiple, to the interlocking business models of high-service and low-end telecom competitors in Denmark (an interaction displayed in a splendidly convoluted web of arrows, curves and boxes). If representing business models is a mix of science and art, designing them must be closer to alchemy – but, then, understanding how base metals can produce golden success is the name of the challenge!
Business Model Design: An Activity System Perspective
The authors define a business model as a template of how a firm links factor and product market to deliver value to stakeholders (customers, partners, etc.). Their article argues that the activity perspective offers such advantages as a framework (+language and tools) highlighting business model design as a key entrepreneurial task, and as a natural approach leading to a holistic view of the wood, not just the trees.
They consider the options of a young firm with an exciting new technology: surely it will be a roaring success. Or will it? The critical decision is to settle on the business model that can best commercialise their asset. Can it raise the money to build machines embedded with the technology – or should it license its asset (or sell it on) and watch as a downstream partner makes the bulk of the exploitation profits? Or is there a middle road as - say - a specialist supplier of the technology to target industries? The business model will define the firm’s activity system: who its partners and customers are, what value chain it operate in and where (and what kind of bargaining power it will have there), how big the overall ‘value pie’ will be and how much pie will land on its own plate. In designing the business model, the authors suggest two sets of parameters: the elements (content, structure and governance) describing the activity system’s architecture, and the themes (novelty, lock-in, complementarities and efficiency) that define how it will create value.
How do Business Models Emerge?
Business Model Evolution: In Search of Dynamic Consistency
The authors consider the two fundamental guises in which business models habitually appear – as static representations (good at showing how things are) or as dynamic frameworks (better at indicating how they might be). Naturally, the challenge is to attempt to heal this ‘split personality’. Keeping it simple, the authors build on their business model representation on an RCOV framework of three fundamental ‘building blocks’ – Resources/Capabilities; Organisational structure; Value propositions - to discuss how business model operations are characterised by the interactions between these core components (and within their subsidiary elements), and are also dynamically affected by intertwined sequences of deliberate management actions and environmental trends and ‘jolts’.
Their thesis is that these factors and forces are continually reacting against each other so that the normal state of business models is one of ‘permanent disequilibrium’, and they give the label ‘dynamic consistency’ to the capability firms require to build and sustain their performance while changing their business model at the same time. Woven through these arguments is the illustrative story of Arsenal Football Club’s successful reactions to a ‘mix’ of environmental shocks over the last decade that have seen them retain their position among English football’s top four and collect both trophies and admirers in considerable numbers in the process.
Business Models: A Discovery Driven Approach
The author sees the business model concept as a powerful idea for strategic thinking, shifting focus from considering a firm’s resources to what use it makes of them, promoting an ‘outside-in’ perspective that takes account of value to the customer, and accepting that competitive advantage will be dynamic rather than static, and that models must be adapted to environmental changes. Complex, fast-moving environments demand strategies made by insight, experimentation and learning, rather than traditional planning skills and ‘rock-ribbed execution’. While the dot.com boom revealed that, while traditional business models could seem to tie innovators down, old-fashioned ideas like having – or failing even revenues - continued to matter, ‘the idea that competitive advantage could be created by doing something differently remained with us’.
The author identifies core business model components as the ‘unit of business’ – the product/service that actually appears on the invoice – and its ‘key metrics’ - the efficiency/effectiveness with which resources are deployed to create process/operational advantages. She rehearses how the variety of conceivable business units has expanded to include advertising, ‘freemium’, barter and other non-sale models, and notes how key metrics may vary too – think how Dell or Southwest Airlines deliver completely traditional products.
Where positioning and capability theories give managers little leeway for action, the business models perspective allows them to really manage – and the author recommends learning via experiments, organised to limit down side exposures, and taking place across as well as within firms. Out-turns will be unpredictable - experiments by one firm may yield lessons exploited by another. Firms (Kodak is the main example here) must realize when established business models are running out of steam, and engage in the key conversations needed to gather knowledge and to overcome the institutional and cognitive barriers to embracing the new business model.
Business-Model Innovation: General Purpose Technologies and their Implications for Industry Architecture
Business model innovation is all the rage. While a host of ICT and internet names – such as Google and Apple - are regularly proffered as the most high-profile success stories, their efforts have spurred firms in other fields to develop new models relevant to their own situations. This article surveys the ‘markets for technologies’ which are evolving quickly through a broad experimentation phase to address questions of how owners of knowledge capital can best ensure they capture value from their assets. While licensing and sale have always been opportunities, too often they have locked innovators into the fortunes of downstream commercialisers, while the narrowness of potential applications for their specialised technology has put small firms at a disadvantage in their negotiations with such larger partners.
Not any more. The authors focus on the development of ‘general-purpose technologies’ as a novel business model design that can allow small innovators better returns to their efforts by giving them increased bargaining power with a wider array of downstream partners, who themselves have to bear the costs of commercialisation research. Presenting a variety of examples, the authors suggest, further, that this approach represents an important trajectory for change in technology markets and up- and down-stream industry structures that will have unpredictable, but inevitable, consequences.
Strategic Development of Business Models: Implications of the Web 2.0 for Creating Value on the Internet
If the notion of business models is popularly supposed to be a child of the Internet age, we have now moved on (half) a generation, to the point where some Internet business models are established enough to themselves be coming under threat from some even newer kids on the block, many of whom are users, all wearing T-shirts sporting the generic log ‘Web 2.0’. But – what does it mean?: even Tim Berners-Lee doesn’t seem to know. Highlighting some success factors behind two ‘pure’ Web 2.0 players - Wikipedia and Facebook - the authors offer their elucidations of a range of Web 2.0 factors grouped under four headings: social networking; interaction; personalisation/customisation and user-added value. Setting these characteristics against a 4-C codification of established Internet business model types (Content, Commerce, Context and Connection), the authors analyse the relevance of different Web 2.0 trends and characteristics to these types in terms of threats and opportunities, and make recommendations for actions design to make each business model ‘Web 2.0-capable’.
Building new Business Models for Emerging Economies and Social Uses
Business Models: Creating New Markets and Societal Wealth
Nearly ninety years ago, Frank Knight defined the difference between risk – when you know the odds – and uncertainty – when you just can’t know what might happen. How can a business model builder know what to do? This is just the high uncertainty context facing entrepreneurs and investors trying to run Wharton Societal Wealth projects seeking to ‘do good while doing well’. The authors suggest that in ‘near-Knightian’ contexts, ‘an obsession with being right is dysfunctional’ – rather, what is required are mechanisms for reducing uncertainty towards risk, choosing from possible worlds a smaller number of plausible routes, then refining towards a group of probable initiativessome of whichcan be made plannable via experiment and effectuation.
Reviewing the varying success of four WSWP projects, they note the luxury of being able to decide what you will (and won’t) do, and the need to identify the acceptable tradeoff space between societal outcomes and profitability targets and preplan rules of engagement and disengagement. Having savvy local politics - and a Godfather to ‘heat-shield’ your activity against meaningful opponents (in commerce or government) - have also proved vital, as has the ability to handle such unexpected outcomes as too many chicken feathers! The authors offer their process - of identifying plannables amongst possibles, starting small, redirecting in the light of responses and being prepared to walk away in the face of irresolvable realities - as descriptive rather than prescriptive. But while it is set firmly in the ‘societal good’ context, they suggest it could also be valid for more capitalistic organisations facing the challenges of creating whole new markets, or of trading off against multiple objectives.
Building Social Business Models: Lessons from the Grameen experience
Built on collaboration between two researchers and a reflective practitioner – the Nobel Peace Laureate Muhammad Yunus, Grameen Bank’s founder - this article essays a straightforward outline of business model design for a social business. Located somewhere between a profit-maximizing business and a non-profit charity, a social business, although more cause- than profit-driven, still has products, services, customers, markets, expenses and revenues. It needs to cover its costs (to avoid wasting part of its energy raising money) and be able to repay investors, but surpluses are routed towards social beneficiaries via reinvestment, rather than paid to shareholders as dividends. Scanning the business model innovation literature for for-profit ‘lessons’ that can serve to uncover the new value propositions and constellations needed for social business model innovation, the authors identify challenging conventional wisdom, finding complementary partners and undertaking continuous experimentation.
The authors outlinethree examples of Grameen/MNC partnerships - built on the latters’ CSR motivations and the small-scale entrepreneurial energy Yunus identifies on the ground - designed to deliver clean water, healthy food and affordable mobile phone calls into poor rural Bangladeshi villages. In doing so they surface two further elements specific to social business models – the need to recruit social-profit-oriented shareholders and to specify the social profit objectives clearly in the model design. The authors see the chance that increased use of social business models could save capitalism from itself, if the current dominant shareholder paradigm can be challenged and replaced by a broader stakeholder value maximization imperative.
Corporate-NGO Cooperation: Co-Creating New Business Models for Developing Markets
The authors consider – and exemplify – a range of corporate/NGO collaborations to identify how the resources and capabilities each possesses can ‘mend holes’ in each other’s developing country markets business models. Besides the situation where they simply contribute to each others success, they illustrate how such collaborations can yield truly complex and innovative models that can yield mutual benefits, enabling corporate to make profits and NGO’s to serve their clients more effectively. Their examples range from an initiative supporting home-building with combinations of design, materials sourcing and finance to address the acute housing shortage blighting the lives of perhaps 20 million poor Mexicans, to a complex collaboration involving UNICEF and WHO, a Japanese pharma and a US oil major, in making and distributing mosquito-nets In Tanzania. The authors note the importance of good fit and trust between the two organizations, of fully understanding the developing country environment and of supporting its business capacity development, as key elements to the success of such innovative combinations of firm and NGO resources and skills.
Cost Innovation: Preparing for a ‘Value-for-Money’ Revolution
The implications of this article are really quite alarming. It offers a vision of a competitive climate completely transformed by new players with new kinds of business models - and announces this future is already upon us, whether we are prepared or not. Great for consumers: but what are the implications for employment - and societal structures more generally - in Western economies?
Outlining the generic strategies (differentiation and focus) incumbents have classically used to see off low—cost competitors, the author tells how emerging world players are increasingly using radical cost innovation strategies to nullify incumbents’ advantages and offer global customers more for less – and dramatically so. Offering high technology/increased variety at low prices, and niche products into mass markets, new emerging-market multinationals, led by the Chinese dragons, now supply more than half the world’s microwave ovens and shipping containers, are world leaders in pianos, rechargeable batteries, wind power generators, regional jets – the list goes on and on.
He lists three global pressures behind this ‘Value-for-Money Revolution’. Emerging economies markets are increasingly driving global demand patterns, while the sheer population sizes are fuelling downward pressure on global wage rates. And global retailers, already gate keepers in deciding which products they will and won’t offer their costumers, are also driving down costs to offer them increased value for money at ‘every day low prices’. And how can incumbents compete? Three suggestions are offered: learn to combine cost innovation ‘tricks’ with their established player’ strengths; set up subsidiaries with adequate authority and staffing to run their own cost innovation business models; or seek alliances with emerging country players to yield greater global competitiveness for both sides. But - the author warns unequivocally - ‘doing nothing is not an option’
Implementing Business Models: Key success factors
Business Model Innovation: Opportunities and Barriers
A technology’s value will remain latent unless and until can successfully be matched with a suitable business model. Reviewing his earlier research into the failings at Xerox - whose R&D developed point-and-click, Postscript and Ethernet which all ended up making money, but for someone else - the author points to Business Model Innovation as being vitally important, but also being very difficult to achieve. Following through on the stories of 3Com and Radiohead, he outlines the reconfigurations – and the rewards – associated with being able to handle this forms of innovation, and considers the barriers that have held so many firms back from taking full advantage of their resources and capabilities. He identifies how resistance and conflicts associated with a firm’s ‘dominant logic’ - or not even being able to envisage the notion of a new model - can ‘trap’ firms, and considers how mapping, experiment and effectuation, and leadership can help overcome confusion and obstruction.
Killing Two Birds with One Stone: Profit for Now and Learning for the Future
Despite the high profile of the profit model, the authors point to a firm’s business system as the ‘real meat’ of a its business model: not least because – besides the delivery system where the firm actually produces and delivers value – it can incorporate an ancillary learning system that can gain the firm further value from its activities. While the profit earns revenues for the short term, its accumulated learning is the other ‘stone’ – and can represent a source of considerable competitive advantage for the future.
Using Google and Toyota (among others) the article describes how firms can assemble knowledge about their own operations, as well as about their suppliers and customers. Note that ‘Doing is Learning’, the authors caution against the unwise bundling of activities, as (besides involving costs in monitoring external works and in integrating them with internal activities) providing another organisation to learn more about a firm’s business than the firm does itself. They recall how Sharp’s decision to internalise production of LCD components for its calculators gave them – 15 years later – a head start in the huge LCD TV market, and show how the daily operation of a business system designed to incorporate learning helps firms modify their capabilities to meet new challenges.
Embedding Strategic Agility: A Leadership Agenda for Accelerating Business Model Renewal
Efficient firms’ business models naturally become more stable - and thus more rigid – over time: so how can they best handle business model renewal in the face of strategic discontinuities and disruptions? Using a wide variety of illustrative examples, the authors outline three core meta-capabilities firms need to increase their organisational agility so as to foster the purposive and strategic evolution of their business models: strategic sensitivity, leadership unity and resource fluidity. In an extended guide for leaders needing to accelerate renewal and transformation in their business models, the authors offer a repertoire of five concrete actions under each heading.
Under strategic sensitivity they proposeanticipating, experimenting, distancing, abstracting and reframing as offering leaders the insight, perception and awareness they need to make deliberate reforms to their business models in time to maintain their firm’s strategic advantage. Under leadership unity, theyrecommend dialoguing, revealing, integrating, aligning and caring as steps top teams should take towards increasing their ability to make bold, fast decisions and avoid being bogged down in ‘win-lose’ politics. Finally, under resource fluidity, they list decoupling, modularizing, dissociating, switching and grafting as moves designed to outflank inertia and free up established internal capability and resource linkages, so they can be rapidly reconfigured and redeployed into new, transformational business model designs.
Business Models Innovation through Trial-and-Error Learning: The Naturhouse Case
What do you do if your business model is performing OK until your domestic markets are first liberalized and then plunged into recession – and then most of your stock (and nearly your staff too) are washed away in a flood? For an owner-manager with vision and resilience that answer is obvious – you make a new business model. Why not? This article recounts how Felix Revuelta – the entrepreneurial leader of the Spanish wholesale dietary products business Kiluva – exploited the continued robustness of its old model to buy time to leveraged his sectoral knowledge in a sequence of trail-and-error experiments based on a new retail concept – Naturhouse. Virtually everything about the first store was wrong but the top management team kept trying and learning, and gradually perfected a new product+service franchise business model (but which still served the same product into the same market). After opening just four stores in five years, Naturhouse then scaled up their model with a vengeance, opening another 1,500 across Europe in the next ten – in 2007 a new store every working day – leaving competitors gasping in their wake. The authors note the close connection between these apparently dissimilar periods of growth, as the one laid the foundations for the other.
The authors note the overriding importance of learning – from the OM’s inheritance from his previous experience, from feedback from both early failure and then later success in pilot store explorations, and from the multi-dimensional experience of 1,500+ franchises during their exploitation phase, Constantly recycling learning from stores to head office and back again leaves the operation balanced to exploit further conventional markets, and explore into less familiar territories.
An Individual Business Model in the Making: a Chef’s Quest for Creative Freedom
Do business models always have to be about firms or business units? Can an individual have one? This article starts from the premise that scientists, artists and other ‘creatives’ can – and do – and that their vision and drive provides direction and energy that give their careers a structure which can be defined as ‘a business model’. And which individual do the authors take as their case: well - why not the Best Chef in the World? They recount the creative history of Ferran Adrià whose cuisine was based – like his Michelin 3-Star restaurant elBulli – on the Mediterranean mid-way between Barcelona and France, but has since developed to give the world ‘spherification’, cooking with liquid nitrogen and cookery books without recipes, and leveraged him to global celebrity status. The triggers and transformations in Adrià’s business model are enumerated over four periods as his journey towards creative freedom sub-divides into quests to find his own ‘authentic’ style; to gain recognition for his developing culinary ‘language’; and to broaden his influence into science and the arts. The authors unpack how the development of individual creativity, consolidated as a strategic resource via his creativity workshop, creates value which is appropriated by the chef himself, his immediate team and elBulli’s diners, and beyond that by commercial collaborators and the haute cuisine and Spanish tourist sectors and in even broader circles of academia and society at larger – as well as how it ‘slips’ to be misappropriated by imitators.
From Recipe to Dinner: Business Model Portfolios in the European Biopharmaceutical Industry
If heavyweight incumbents find it difficult to face up to the need to adapt or renew their business models, where should they turn to look for guidance - could it be that much younger, smaller and apparently more fragile firms could give them useful lessons in agility, light-footedness and the successful management of multiple identities? These authors pick up the baton of business models-as-recipes from this issue’s introductory paper to extend the analogy: if a business model is a recipe for a meal, then managing a portfolio of contrasting but interlocking models could perhaps be likened to cooking a menu offering a balanced palate of tastes and textures for a whole dinner.
Investigating a group of examples from the European biotech landscape, they note how these (often very) small firms balance their levels of promise (time-lags, risks and expected returns) against their interdependencies by running a suite of interlocking business models that bridge upstream research, venture capital and large firms in ways that ensure both cash flows and idiosyncrasies are developed to benefit their medium vitality and their longer term health.
Complex Business Models: Managing Strategic Paradoxes Simultaneously
The world is getting bigger, faster and more competitive: increasingly, firms may find themselves with paradoxical strategies, running complex hosting architectures that entail managing contradictory business models simultaneously. There will be tensions, which will call for substantial management skills. Of a variety of different ‘paradoxes’, the authors focus on the top management skills and practices needed to keep on top of a well-known duo: exploiting and exploring.
Looking at twelve business units running these two imperatives side by side, the authors find that six succumb to the temptation to make an ‘either/or’ choice (and end up with a tidy, unitary strategy), but that the other six find ways of managing the more complex and challenging ‘both/and’ choice. Looking at top-team actions for managing paradoxes, they identify dynamic decision-making that looks for synergies - but that more often switches assets and capabilities to meet up-coming demands - as well as specifying both over-arching visions and agenda specific metrics; finding ways to live with and learn from the tensions; and engaging (rather than denying) the conflict inherent in the tensions – even building a sound-proof room for leaders to fight in! While some teams take collective responsibility for managing tensions, in others it is vested in the leader – but both styles work.