Making Sense of Business Models

Transcription

1 Making Sense of Business Models Susan Lambert School of Commerce, Flinders University of South Australia SCHOOL OF COMMERCE RESEARCH PAPER SERIES: ISSN: Not to be cited without permission of the author 1

2 Abstract The electronic commerce literature reveals a lack of consensus on the scope of the term business model and therefore the necessary attributes of business models. This creates an obstacle for the development of taxonomical research and problems for academics and professionals relying on the literature for guidance in understanding business models. This paper interrogates the meaning of the term business model identified in the electronic commerce literature and the attributes of business models either expressed in or implied by the definitions. The objective is to determine the essence of business models and the necessary and sufficient attributes of business models with a view to forming the constructs of taxonomical research. It is proposed that the necessary infrastructure and competencies that are vital in implementing a given business model are directly derived from the business model itself. Business models should be useful in distinguishing one business from another and in identifying the resources necessary to implement them. The data contained in the business model along with the resource specifications and the chosen business strategy will provide valuable input for information systems development. Introduction Business model is a term that is used in many contexts and it is difficult to understand exactly what a business model is (Timmers, 1999; Mahadevan, 2000; Hawkins, 2002). Some authors do not define the term but make reference to it and/or present taxonomies of business models (Bambury, 1998; Saloner and Spence, 2002; Chen, 2001). Others including Kalakota and Robinson (1999) and Whiteley (2000) do not use the term business model at all but use terms such as business designs and strategies. The aim of this paper is to explore the literature for the meaning of the term business model and to determine the necessary attributes of business models with a view to 2

3 developing a framework by which taxonomies can be constructed. Although some authors claim to present taxonomical data on business models they fall short of the empirical data collection requirements and statistical analysis that distinguishes taxonomies from other categorisation systems. 1 Before exploring the meaning and attributes of business models it is useful to reflect on the purpose of models in general. The Purpose of Models In trying to understand reality it is useful to remove unnecessary detail and create models of the pertinent characteristics or conditions. Models are scaled down and/or simplified versions of reality that focus on the essential characteristics or attributes of interest omitting irrelevant details. To construct a useful model it is necessary to know its intended use so that the essential elements can be identified and included and irrelevant details can be removed. For example, a model of a vehicle created to distinguish a car from a truck would look like the actual car but without much of the complexity such as braking system, engine or exhaust system. Only the characteristics that reflect the important differences between cars and trucks would be included. The characteristics that distinguish one car from other cars are not relevant and should not be modelled because they do not help to convey the differences between cars and trucks. If however, the model of the vehicle were created to explain the way that the motor eventually turns the wheels on a car, then the motor, the clutch and gear box, the tail shaft, differential and axle, and the wheels would need to be depicted. The doors and windscreen wipers would not be included because they are irrelevant in explaining the system that turns the wheels. In creating business models the proposed purpose of the model must be established before the attributes of the model are specified. If the purpose is to distinguish one type of business from others then the only characteristics that should be modelled are those that assist in distinguishing one business type from another. 1 See Hanks (1993), for a discussion of taxonomical research requirements. 3

4 If the purpose is to explain various business systems, structures and relationships, then it must map the complexities of the particular business system. Enterprise models serve such a purpose. Enterprise models are developed and used in early stages of systems development as an effective [method] for gathering the business needs and high-level requirements, (Persson and Stirna, 2000). Persson and Stirna s (2000) survey revealed that enterprise modelling was useful in creating a multifaceted map of the business as a common platform for communicating between stakeholders. Consistent with this view Gordijn et al (2000a) propose that the business model should illustrate the business essentials necessary for electronic commerce information systems requirements engineering. Gordijn et al (2000b) propose a business model ontology that enhances business- IT alignment and smoothens the transition to e-commerce systems development. These business models must represent the internal workings of the business and therefore have the potential for translation to programmable systems. Although Gordijn et al (2000b) relate the business models to e-commerce there seems to be no reason why they cannot be applied equally to non-e-commerce business. The question is, what is the function of a business model? Is it to simplify a complex system or structure, as do enterprise models, or is it to illustrate differences between various types of businesses? Ideally it should have the potential to do both. At an abstract level it should depict the features of the business that distinguish it from others and it should also provide the means by which the complexities of the business can be modelled. Which aspects of the business and the depth of detail of the business that the business model depicts need to be established. It may be argued that the business model should encompass all aspects of the business or alternatively, that it should focus on a particular aspect of the business. If too much detail is included in the business model its purpose of simplifying complex reality is diminished. If too little detail is included then its purpose of distinguishing between essentially different businesses is defeated and we end up with an abstract business model that encompasses all businesses. The 4

5 objective is to find the attributes that ensure sufficient and only relevant information is contained in the business model to serve its purpose. Business Model Definitions As a first step in determining the nature of business models it is useful to examine the definitions present in the literature. What is revealed from this examination is that there exists no generally accepted definition of business models and consequently there is little consensus as to their attributes. The language used to describe business models leaves the reader wondering just what a business model is. Rappa (2003), Afuah and Tucci, (2001) and Turban et al (2002) refer to business models as methods by which firms do business. Timmers (1999), and Dubosson-Torbay et al (2002) refer to business models as architectures, whilst Krishnamurthy (2003:p14) states that, A business model is a path to a company s profitability. Others refer to business models as descriptions or specifications (KMLab Inc, 2000, in Chesbrough & Rosenbloom, 2002; Gordijn et al, 2000a&b; Weill and Vitale, 2001; Elliot, 2002; Hawkins, 2002). Rayport and Jaworski (2001:pxiv) add to the confusion with the statement While many believe that Internet businesses do not have business models, we strongly disagree. This statement suggests to the reader that firms can choose whether or not to have a business model however it is apparent even from the diverse terminology used by other authors that a business model, be it a method, an architecture, a path, a specification or a description, exists for every firm; it is just a matter of articulating it. Hamel (2000), Porter (2001), Hawkins (2002), Betz (2002) and Rappa (2003) use quite abstract definitions of business models whilst others including KMLab Inc., (2000, in Chesbrough and Rosenbloom, 2002) provide very detailed definitions that specify the underlying attributes of business models. The common ground is that the business model should depict the business in relation to the other entities that form part of the value network and how the firm expects to generate revenue. The substantive difference between definitions relates to the scope of the business model. KMLab Inc., (2000, in Chesbrough and Rosenbloom, 2002), Afuah and Tucci (2001), Betz (2002) and Dubosson-Torbay et al (2002), require the business model to depict 5

6 internal resources and workings of the firm whilst others including Timmers (1999), Rappa (2003), Weill and Vitale (2001), Elliot (2002), Turban et al (2002) and Hawkins (2002) do not. Instead, this latter group recognise the role of marketing models, production models and business strategies in depicting internal resources and organisational issues. Timmers (1999) states that the marketing model, whilst being separate from the business model, must be compatible with the business model. Elliot (2002:p7) states Business strategies specify how a business model can be applied to a market to differentiate the firm from its competitors,.... Weill and Vitale (2001) draw a distinction between business models and business strategies and suggest that the business model and business strategies must be compatible. Weill and Vitale (2001), also take the view that infrastructure, critical success factors and core competencies flow from each unique business model but are not attributes of the business model itself. In addition to the differences in definitions of business models significant differences exist with respect to the constructs of business models. For instance, Gordijn et al (2000a) and Rayport and Jaworski (2001), Afuah and Tucci (2001) take a valueoriented approach to constructing business models. Hawkins (2002) takes a modal view requiring the transaction mode, the revenue mode and the exchange modes to be modelled. Hamel (2000) on the other hand uses customer interface, core strategy, strategic resources and value networks as constructs and Weill and Vitale (2001) construct their atomic business models from major entities, major flows and revenues and other benefits to each participant. Lambert (2002) provides a table of the attributes assigned to business models by various electronic commerce authors. It is evident that a number of approaches exist. Business Models Identified in the Literature Taxonomies and other classifications of business models can be found in the electronic commerce literature, however, they are predominantly anecdotal accounts of traditional business models that have been transformed to suit the electronic commerce sector and those that are unique to electronic commerce. They are differentiated by the value offered to the customer (eg. product or information), the 6

7 method of raising revenue (eg. advertising, commission, registration) or where the firm sits in the value chain (merchant, manufacturer or intermediary) to mention a few. In general the descriptions consist of unstructured narrative making it difficult to distinguish one model from another and difficult to appreciate the underlying resource and infrastructure requirements of each (Lambert, 2002). Weill and Vitale (2001), Schneider and Perry (2000) and Eisenmann (2002) use a few (six to eight) broad categories whereas Rappa (2003) and Bambury (1998) distinguish businesses on as little as a single attribute resulting in twenty-seven and fourteen different models respectively. Bambury (1998), distinguishes between what he calls transplanted real-world business models and native Internet business models, identifying eight transplanted real-world business models and six native Internet business models. Rappa (2003) proposes eight major categories of business model with no fewer than twenty-seven sub-categories. Afuah and Tucci (2001) list and describe nine business models whilst Timmers (1999) and Lawrence et al (2000) each propose eleven business models. Kalakota and Robinson (1999) do not use the term business model. They list seven e-business designs that they then refine adding detail that relates to business strategy. Hawkins (2002) observes that the literature lacks the systematic development of taxonomies and frameworks and that Recent attempts to create taxonomies of business models mostly amount to no more than random, unrelated lists of business activities that just happen to occur on Internet platforms. A Proposed Framework for Constructing Business Models The position taken in this paper is that the business model should describe, in a structured way, how the firm receives and provides value to other entities in the value network and how the entities within the value network inter-relate. It should be an outward looking model free from details relating to the internal workings of the firm since the internal working of the firm are dependent on the values assigned to the business model attributes. A business model is the collection of attribute values that 7

8 describe a business concept. The necessary and sufficient attributes that must be assigned values in order to describe the business concept are: The value being offered by the firm such as products, services or information. The value being received by the firm such as revenue, promotion, products, services or information. The revenue model may need to be elucidated since this can have significant implications for organisational and resourcing decisions. The role the firm plays in the value chain such as intermediary or manufacturer/wholesaler. The entities with which the firm interacts such as consumers, suppliers, intermediaries and allies. The nature of the interactions including the channels of interaction such as the Internet, face-to-face and telephone. The business model consists of the collective values assigned to these attributes and will imply certain resource requirements and organisational structures. Weill and Vitale (2001) suggest that the atomic e-business models, as they refer to them, can provide insight into what is required to successfully operate the e-business type. These requirements such as IT infrastructure, human resource requirements, key competencies, financial models, production models etc. provide information necessary for the implementation of the business model and will vary according to the values assigned to the business model attributes. For example, a firm adopting a content provider business model will require resources and staff to produce timely accurate information faster than its competitors or more accurately than its competitors and present it in a way that appeals to the user. Their resource requirements will centre on capturing and generating information and dealing with business-to-business relationships. In contrast the firm that adopts a portal business model will require resources and skills based around Internet and web activities along with marketing skills relating to both business-to-consumer and business-to-business relationships. 8

9 Figure 1 illustrates that the choice of business model will determine the resources required by the firm and potential strategies available to the firm. Strategy will also be dependent on the resources available to the firm. Figure 1: Relationship between Business Models, Resources and Strategy Business Model The value offered and to whom The value received in return and from whom The firm s position in the value domain The nature and channels of interactions of the firm with other entities in the value domain Business model choices constrained by resource availability Resource needs determined by the choice of business model Strategy and structure must be compatible with the business model Strategy and Structure Business systems Manufacturing model Management structure Marketing strategy Competitive advantage Growth strategy Strategy and structure choices will have resource implications Resources Capabilities IT infrastructure Physical assets Financial resources Human resources Strategy and structure will be dependent on the resources available For example a firm adopting a direct-to-consumer business model to sell its physical products over the Internet will require a computer system and IT skills to build and manage the site, customer relationship skills and the logistics to deliver goods to multiple and possibly geographically dispersed areas, and of course the ability and resources to manufacture the products. A firm adopting an intermediary business model will require skills and assets to manage relatively large amounts of data from both customers and suppliers. They will require relatively greater IT infrastructure and an ability to attract 9

10 large numbers of consumers to their site since this is how suppliers are attracted to the site. The bi-directional arrows between business model and resources illustrates that the firm can extrapolate potential business models based on its available resources. A firm wanting to embark on Internet based commerce could look at its resource base and determine the business models it could implement. If the firm s skills are in marketing and customer relationship management it might choose to establish itself as an intermediary. If the firm does not have the web skills or the marketing skills it may choose to utilise an ally or intermediary to provide the consumer interface. It may become a content provider to various sites with the aim of building a respected reputation in the marketplace. Based on the business model and the nature and amount of the resources available to the firm the business strategy can be devised. The information compiled at this stage will provide a blue-print of the business that can facilitate information systems requirements modelling, an application recognised by Gordijn et al (2000 a&b) and Persson and Sterna (2000). Figure 1 also illustrates the relationship between the three levels of information and the iterative process that needs to be adopted in deciding appropriate business models from an internal viewpoint. If the firm chooses a business model for which it cannot acquire the necessary resources it must examine the business model options again with a view to finding a business model that is compatible with its resources. Once this has been achieved the firm must devise strategies to implement the business model. During this process the firm might discover that certain strategy decisions alter the resource requirements that in turn might cause the original business model to be questioned. The process is therefore iterative. By restricting the business model to an abstraction of the marketplace relationships and interactions of the firm, the essence of the business concept is captured and communicated. Differences between business models can be illustrated exclusive of redundant detail that flows from the business model. That detail is added in two stages, firstly the resources to enable the firm to implement the business model effectively and secondly, strategies that show how the firm will deploy its resources to achieve the business objectives. The resources available to the firm coupled with the strategies for 10

11 deploying those resources potentially provide a competitive advantage for the firm that will enable it to sustain profits. It is expected that the adoption of this framework will result in just a handful of discreet business models. The resource requirements that flow from each business model will differ and firms adopting the same business model will have reasonably homogeneous resource requirements. Conclusion This paper has examined and analysed the use of the term business model in the electronic commerce literature. It has revealed a lack of consensus as to the nature of business models and therefore the attributes that make up business models. This has created a barrier to structured taxonomical research since the constructs on which to base such research is missing. Taxonomical research is required to determine the incidence of business models in practice. Once taxonomies based on predetermined business model constructs have been established the relationships between attribute values and resource requirements and strategies can be tested. A narrow definition of business models that focuses on the relationship of the business with the value network has been proposed in this paper along with a framework for constructing and selecting business models. It is anticipated that the business model framework will dictate the constructs of future taxonomical research. 11

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