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Evolution of the Business Model Concept
This is a brief overview of how the business model concept emerged and evolved from the early studies until these days. Two comprehensive studies on business model have been used as the main reference. The first one dates back to 2005, when Ghaziani and Ventresca (2005) performed an analysis of the use of the term “business model” in business research, reviewing general management articles from 1975 to 2000. The second one is a more recent study conducted by Amit et al. (2011), who extended their research period to the year 2010. Finally, I have personally carried out a review of the business model literature in the past three years and I will provide further data in the following paragraphs.
Between the 1975 and 1995, the number of research published was limited to 166, mainly characterized by two distinct trends. In fact, more than 50% of the articles contained the word business model as a reference to either computer systems or as a « tacit » concept, assuming the readers knew the definition of business model (Ghaziani & Ventresca, 2005). Both Amit et al. (2011) and Ghaziani and Ventresca (2005) recognize the mid 1990s as the turning point of the business model studies. With the advent of the digital economy and the Internet, not only did the term business model gain prominence, but also its heterogeneity widely spread across different disciplines (Amit et al., 2010; Ghaziani & Ventresca, 2005). In this period, more than 80% of studies were distributed across a cluster of five frames: value creation, revenue model, e-commerce, tacit definition and relationship management (Ghaziani & Ventresca, 2005). Albeit the lack of dominance of a single framework, the common theme is the creation of value in a changing business environment. According to Ghaziani and Ventresca (2005), the convergence around the concept of value creation could have led towards a global definition of the business model construct. Nonetheless, the hope of a movement in the direction of a global academic standard for business model has been proved wrong by Amit et al. (2011), whose findings stretch up to the year 2010. They concluded that researchers have been trying to establish a universally recognized construct for business model, but as of now the results are not satisfactory. Many scholars attempted to provide a definition of the term business model, which has been alternatively defined as: « a statement », « a description », « a representation », « an architecture », « a conceptual tool or model », « a structural template », « a method », « a framework », « a pattern » and « a set » (Amit & Zott, 2001; Chesbrough & Rosenbloom, 2002; Johnson et al., 2008; Teece, 2010; Casadesus-Masanell & Ricart, 2010; Wirtz et al., 2010; Amit et al., 2011). The presence of multiple definitions, as well as the increasing number of disciplines interested in the topic of business model, while increasing richness does not necessarily bring clarity.
Other researchers have tried to define the components of the business model (Osterwalder et al., 2005; Teece, 2010; Johnson et al., 2008; Wirtz et al., 2010) and to explain how these dimensions are linked together (Sosna et al. 2010). Other academics adopted a more general approach: Cavalcante affirms that is impossible to determine the components of BM because they depend on both « individual cognition and the specific characteristics and necessities of a company, and thus differ from business to business » (Cavalcante et al., 2011, p.1330). The same argument is strengthened by Amit & Zott (2013), claiming that BM research can progress even in the absence of a single definition.
However, existing definitions partially overlap, generating a multitude of possible interpretations (Amit et al., 2011; Ghaziani & Ventresca, 2005; Lambert & Davidson, 2012). The reasons for this lack of agreement may be manifold. On the one hand, academics have often adopted definitions that only fit the purposes of their studies, hence hampering the cumulative progress towards a unique definition (Amit et al., 2011). On the other hand, the term business model is used in a variety of academic and functional disciplines, reflecting the multidisciplinarity of the subject, but none has officially claimed its ownership (Ghaziani & Ventresca, 2005). Business model frameworks are often used to describe specific organizations, failing to highlight the relevant differences among industry segments or organizational structures.
Business models are frequently mentioned but rarely analyzed and this might have increased the confusion. This approach limits the generalization of the findings (Lambert & Davidson, 2012) and the substantial differences among industrial sectors makes the creation of a unique framework a daunting task. Moreover, the complexity of the domain has certainly contributed to the lack of a conceptual agreement.
Business Model: Towards a Unified Perspective
Notwithstanding the lack of a common conceptual base, the literature shares some convergent points. Primarily, the creation of value lies at the heart of any business model (Hwang & Christensen, 2008; Amit & Zott, 2010; Chesbrough, 2012; Sorescu et al., 2011; Boons & Lüdeke-Freund, 2012; Johnson, 2008; Teece, 2010; Amit et al., 2011). A business model describes how a company chooses and organizes its activities in order to create and capture value.
But, what is value? Given the importance of value in all business models, it is worthwhile to dedicate some time and understand the concept. In the academic research, there has been an ongoing debate on the definitions of business value (Brandenburger & Stuart, 1996). Porter (1980) defines value as « the amount buyers are willing to pay for what a firm provides them. Value is measured by total revenue ». I would argue that this definition has very strict boundaries that might not be suitable in an increasing interconnected world. Is value related to only the company and customers? Or should organizations be considered as a network of relationships, both internal and external, where value is viewed as a collaborative and common goal for the whole network? As explained below, the latter is more suitable to the latest thoughts on business model.
After value is defined, how to measure it? Value can be measured in pure financial terms, such as revenues, discounted cash flow, cost reduction or economic value (Chesbrough, 2010). It can also be measured by using qualitative metrics, such as relative benefit, customer satisfaction, design or novelty (Osterwalder & Pigneur, 2010). There is a strong consensus among scholars that the latter is the ultimate goal of a business model (Chesbrough & Rosenbloom, 2002 found in Amit et al., 2011). Regardless of the metrics chosen to measure value, each of them would always be anchored to a reference point. In fact, business model represents multiple stakeholders, each with different goals, needs, and perspectives of value. This comes down to the core principle that differentiates business strategy, which is more concerned with the ability of a company to capture value, from business model innovation, often referred to the capacity of creating sustainable value for all stakeholders: the focal firm, customers, suppliers, and other exchange partners (Amit et al., 2011). In conclusion, it is not possible to properly define value without referring to a specific group of stakeholders.
After having clarified the aspect of value that lies at the center of the business model literature, Amit et al. (2011) identified other common areas: 1) The business model is considered a new unit of analysis, distinct from product, firm or industry and its boundaries are wider than those of organizations; 2) Business models try to explain how organizations do business in a holistic view; 3) Value creation and value capture are the ultimate goals of business models. Recently, Amit & Zott (2013) extended their analysis and identified two more elements of convergence: 4) Value creation is related to all stakeholders; 5) Activities carried out by the firm are as important as the ones performed by partners, suppliers and customers. In addition to the points above-mentioned, the term business model has been mainly employed in the explanation of three phenomena, called also « silos » (Amit et al., 2011): the use of technology in organization; strategic issues; innovation and technology management.
Latest Thinking on Business Model
Since the comprehensive study of Amit et al. (2011), the research on business model proceeded relentlessly. Hence, I have personally conducted a review of the latest publications related to the concept of business model (See methodology for further information). As a result, I do see a strengthening of some elements discussed by Amit et al. (2011) in their review, as well as the emergence of new « trends »:
1. Various scholars have studied the BM concept in different industrial sectors, but there is an increase interest on the application of BM in developing economies and how the concept can be adapted and leveraged to understand the needs of customers in those specific countries (Li & Kozhikode, 2009; Mason & Leek, 2008; Wu et al, 2010).
2. I have noticed a significant dichotomy between the use of BM either as a concrete tool (Doganova & Renault, 2009; Amit & Zott, 2013; Boons & Lüdeke-Freund, 2012) or as a conceptual thinking (Wu et al, 2010; Dahan et al., 2010; Cavalcante et al., 2011).
3. The concept of value creation and appropriation is not solely restricted to the « economic value ». The holistic view of BM, whose structure embraces various stakeholders, is tied to the significance of social value; from here, the concept of co-creation is taking place (Dahan et al., 2010).
4. The creation of a new business model is not sufficient to gain a competitive advantage; it should also be difficult to imitate. However, a « Good product that is embedded in an innovative business model, however, is less easily shunted aside. » (Amit & Zott, 2012, p. 3)
Definition and Representation of a Business Model
Despite significant disagreements on what a business model is, every organization has a business model, whether it is articulated or not (Chesbrough, 2007). Definitions of business model abound in the academic literature, but for the purpose of this study, I will consider a business model as as a « blueprint that reflects the capabilities of a specific organization ». The decision to adopt a capabilities perspective of business model is rather uncommon, but the motivations will be clarified in chapter 3. Overall, this definition does not relate to any specific industry or class of stakeholders and therefore it successfully represents the characteristic multidisciplinarity of business model. Moreover, a « general » definition suits with the characteristics of the case companies studied in this paper, which span over multiple industries.
Before determining how a business model will be affected by the introduction of different initiatives, it is fundamental to identify the boundaries of a business model (Cavalcante et al., 2011). There has been a long debate in the literature on this matter. The last decade has seen a clear division between those who regard business model as a conceptual tool (Wu et al, 2010; Dahan et al., 2010; Cavalcante et al., 2011; Teece, 2010; Osterwalder et al. 2005) and those who consider it as a real device to be used my managers in their businesses (Doganova & Renault, 2009; Amit & Zott, 2013; Boons & Lüdeke-Freund, 2012). In the last years, a clear convergence towards BM as a new unit of analysis, therefore a managerial tool for capturing, sharing and realizing strategic content, is taking place (Amit & Zott, 2010; 2013; Mason & Leek, 2008; Osterwalder et al., 2005). This is also the view adopted in this article. In fact, representing a business in a schematic form often facilitate the analysis and the communication of change (Weill & Vitale, 2001; Osterwalder et al., 2005). It also helps general managers and entrepreneurs to find new source of innovation, by looking beyond its traditional sets of partners, competitors and customers (Amit & Zott, 2012).
The practical use of business models has been confirmed in different occasions (Baden-Fuller and Morgan, 2010; George and Bock, 2011; Teece, 2010 found in Bock et al, 2012). Several authors have attempted to represent business models through a mixture of informal textual, verbal, and ad-hoc visual representations (Amit et al. 2011). Some authors developed frameworks tied to the notions of a specific industry or market, such as e-business (Amit & Zott, 2001), airline companies (Casadesus-Masanell & Ricart, 2010), retail sector (Sorescu et al., 2011), the Internet (Wirtz et al., 2010), developing countries (Sanchez & Ricart, 2010), insurance brokers (Desyllasa & Sako, 2013).
Studying the changes of a business model in a fine-grained manner demands the identification of its core components as a first step, before dealing with the complex processes of change (Demil & Lecocq, 2010). The prolonged debate on the components of a business model helped to focus the attention on the core processes that deserve most of the attention (Cavalcante et al., 2011), but there still exist two main ideas. From one side, the authors who describe ex ante the main components of a BM (Osterwalder, 2005; Johnson, 2008 found in Demil & Lecocq, 2010). From the other side, the ones who adopt a more inductive approach (Casadesus-Masanell & Ricart, 2010). Both views have pros and cons, but according to Siggelkow (in Demil & Lecocq, 2010, p.231), the « Advantage of an ex ante specification of core elements is that changes in these elements can be measured consistently across firms. »
Since this study is based on data belonging to multiple companies, I will rely on one of the most accepted representations of business model, the one created by Johnson et al. (2008), who split the business model concept into four different components:
1. Value proposition.
2. Profit formula.
3. Key resources.
4. Key processes.
This representation describes BM in terms of relatively broad components, thus avoiding confining the analysis to narrow, predefined conceptual categories that may only suit specific types of organizations or business models (Demil & Lecocq, 2010).
Johnson’s Business Model Framework
Value proposition. Arguably, value creation and value capturing are the ultimate goals of a business model and the value proposition contains the details of how the company achieves them. According to Johnson et al. (2008), there are three constituent parts of the value proposition: the problem that has to be solved; the target group of people who experiences firsthand the issue and the offering, which satisfies the problem or fulfills the need.
Profit formula: it represents the revenue mechanism by which the firm will be paid and the cost incurred in performing the activities (Johnson et al., 2008). It is a blueprint that describes how the company captures value for itself. The revenue model, the cost structure and the profit margin are all parts of the profit formula.
Key resources: the key resources are assets such as the people, technology, products, facilities, equipment, channels, and brand required to deliver the value proposition (Johnson et al., 2008). Not only those elements are important, but also how they interact between each other could determine the success of a business model.
Key processes: managerial and operational processes necessary to deliver and capture value in a systematic way (Johnson et al., 2008). Examples are training, development, manufacturing, budgeting, sales and service.
These four elements form the building blocks of any business. The customer value proposition and the profit formula define the value for the customer and the company, respectively; key resources and key processes describe how that value will be delivered to the customer and captured by the company (Johnson et al., 2008).
First Step: Business Model Innovation Map
The concept of innovating the business model is still blurry, since the literature is full of different interpretations. Furthermore, the process of innovating the BM differs across types of organizations (Sheehan & Stabell, 2007 found in Amit et al., 2011; Cavalcante et al. 2011). This partially explains why business model innovations are still rare. « An analysis of major innovations within existing corporations in the past decade shows that precious few have been business-model related » (Johnson et al., 2008, p.60).
According to Wirtz et al. (2010), change in a business model becomes business model innovation when two or more elements are reinvented to create value in a different way. For Johnson et al. (2008, p.64), a « New business model is required when all elements of the current business model are needed to change. » Amit and Zott (2012) explain that new business models occur by either adding novel activities, by linking the current activities in a new way during the value creation process or by changing the parties that perform the activities. Others are even more general: business-model innovation occurs when a firm adopts a novel approach to commercializing its underlying assets (Gambardella & McGahan, 2010) or by improving the mechanism of creating and capturing value from all the activities the company is involved (Casadesus-Masanell & Ricart, 2011; Chesbrough, 2007).
As shown, in the extant literature there is not a common agreement of when exactly a change in the business model becomes business model innovation. Yet, regardless of the exact number or type of elements involved, all the scholars agree that innovating the business model is both challenging to execute and difficult to imitate, since it involves a multidimensional set of activities (Johnson et al., 2008; Wirtz et al., 2010; Teece, 2010; Desyllasa & Sako, 2013). Not only do not the previous examples represent a unified perspective, but also they presuppose the existence of a barrier separating what is innovation and what is not. As aforementioned, in this study I adopt a different approach.
According to Amit & Zott (2001), the combination of a firm’s resources and capabilities may lead to value creation, which represents the idea behind the dynamic capabilities approach (Teece, Pisano, and Shuen, 1997 found in Amit & Zott, 2001). These capabilities enable firms to create and capture the so-called Schumpeterian rents (Amit
& Zott, 2001), which could be conceptualized as « value ». Value is also the core objective of a business model and this implies a close relationship between the firm’s capabilities and its BM. This viewpoint clarifies the decision of considering business model as a blueprint that reflects the capabilities of a specific organization.
Proceeding with the reasoning, Amit and Zott (2001) affirm that the emergence of a relevant change in the market place affects the capabilities of an organization, which can now be exploited. By posing that, I argue that the existing competences (i.e. capabilities) of an organization play a central role in the dynamics of a business model. This explains why the framework shown in the subsequent paragraph (figure 2) is built on the concept developed by Abernathy & Clark (1985) of « making existing competence obsolete or reinforcing them ». The reasons behind this choice are manifold. Above all, their paper is universally regarded as one of greatest piece in the academic literature, but this alone would not be sufficient. First, the aim of Abernathy & Clark’s investigation is to develop a framework to categorize different types of innovation (Abernathy & Clark, 1985). This is the exact same aim of this study, despite the focus is on business model innovation. However, the second point is even more important. As I stated in the introductory chapter, the emphasis of this research is not on the barriers that impede a company to innovate the business model, but rather on the challenges faced during the process of innovating the business model. Abernathy & Clark use the same argument to introducing their own research, by stating, « Previous research focused on the aspects that spur or retard technical advance » (Abernathy & Clark, 1985, p.3). Therefore, they implicitly zero in on the actual process of innovating.
Lastly, the concept of making existing competences obsolete, or reinforcing them, reflects the idea that not all innovations are equal, but some are certainly more novel than others. Since I consider BMI a new type of innovation, this perspective suits perfect with the content of this study. Moreover, by considering the business model as a blueprint of the organization’s capabilities, any change in the latter determines a variation of the business model structure or linkages.
Having explained this view, I now address the ways in which a business model can be changed. How would a strategic framework that classifies distinct types of innovation in a business model look like (Cavalcante et al., 2011)? To answer these questions, the boundaries of a business model must first be identified (Cavalcante et al., 2011). This will be addressed in the following paragraph, where I map the different business model changes in the Business Model Innovation Map (Figure 2). With the Business Model Innovation Map, I emphasize the idea that discontinuous changes are not as pervasive as we might think. But words like « transformation », « revolution » and « innovation » are incredibly overused, even to describe situations that are anything but novel. Figure 2 wants to restore the meaning of some words to their origins, by showing that the real novel innovations (business model transformation) represent only a tiny part.
Table of contents :
1 Introduction
1.1 Background
1.2 Problem Discussion
1.3 Purpose
1.4 Aim and Contribution
1.5 Chapter Layout
2 The Business Model – Theoretical Evolution
2.1 Evolution of the Business Model Concept
2.2 Business Model: Towards a Unified Perspective
2.3 Latest Thinking on Business Model
2.4 Definition and Representation of a Business Model
2.5 Johnson’s Business Model Framework
3 Theoretical framework
3.1 Business Model Innovation
3.2 First Step: Business Model Innovation Map
3.2.1 Business Model Extension, Business Model Revision and Business Model Transformation
3.3 Second Step: the Challenges
3.3.1 Process Challenges
3.3.2 People Challenges
3.3.3 Strategic Challenges
4 Research Methodology
4.1 Research Approach
4.2 Research Strategy
4.3 Data Collection
4.4 Literature Review: Method
4.5 Sample Selection
4.6 Evaluation of Research Methods
4.7 Final Remark
5 Empirical Data
5.1 Bit4id
5.2 Tylö
5.3 Höganäs
5.4 Beople
5.5 The Boston Consulting Group
6 Findings and Discussion
6.1 Findings
6.1.1 Analysis of the Challenges: Tylö, Bit4id and Höganäs
6.1.2 Analysis of the Challenges: The Two Advisory Firms BCG and Beople
6.1.3 The Most Salient Findings from the Five Case Studies
6.2 Reflection on the Theoretical Literature
6.2.1 Consideration on the Challenges’ Framework: Does Strategy, Process and People Represent a Good Categorization?
6.2.2 Business Model Innovation: An Industrial Perspective
6.3 Six-Steps model
6.4 The Business Model Innovation Map
7 Conclusions
7.1 Managerial Implications
7.2 Theoretical Implications and Further Research
7.3 Limitations
8 Bibliography
