business model

Faculty of Entrepreneurship , University of Tehran

Business Model

By : Aidin SalamzadehTeacher : Professor ZareiFall 2009


Definition(s) Author(s)

A description of the commercial relationship between a business enterprise and the products and/or services it provides in the market.

Hawkins (2001)

"A business model depicts the content, structure, and governance of transactions designed so as to create value through the exploitation of business opportunities"

Amit & Zott (2001)

A business model embodies the logic underlying the operation of business organizations . It should enable one to understand and predict ”how a business company is organized, what it sells, how it delivers products and services, how it adds value”

Gill(2000)

An architecture of a firm and its network of partners for creating, marketing and delivering value and relationship capital to one or several segments of customers in order to generate profitable and sustainable revenue streams.

Pigneur (2000)

as architecture for the product, service and information flows, including a description of the various business actors and their roles; a description of the potential benefits for the various business actors; and a description of the sources of revenues

Timmers (1998)

a coordinated plan to design strategy along three vectors: customer interaction, asset configuration, and knowledge leverage.

Venkatraman & Henderson (1998)


Definition(s) Author(s)

A business model is nothing else than a representation of how an organization makes (or intends to make) money. This can be nicely described through the 9 building blocks illustrated in our graphical illustration that we mention it as "business model canvas“.

Alexander Osterwalder (2009)

the set of activities which a firm performs, how it performs them, and when it performs them so as to offer its customers benefits they want and to earn a profit

Afuah (2004)

reviewing relevant literature and classifying different definitions categorized the business model components that were cited twice or more. The resulting affinity diagram identified four major categories: strategic choices, creating value, capturing value, and the value network.

Shafer & Smith (2004)

"A company's business model deals with the revenue-cost-profit economies of its strategy"

Thompson & Strick (2003)

“A business model is a path to a company’s profitability”. Krishnamurthy (2003)

a strategy that has a reasonable probability of succeeding if well executed.

Saloner (2001)


Business Logic Today

Business Processes

StrategyPlanning level

Implementationlevel

Information & Communication

Technology (ICT) pressure

e-Businessprocesses

e-Business Technology layer

•Positioning•Objectives & goals•Communication of strategy

• Problem: Interpretation of strategy

• Result: Re-inventing strategy

?


Business Logic Tomorrow

Business Processes

Business Model

StrategyPlanning level

Architectural level

Implementationlevel

Information & Communication

Technology (ICT) pressure

e-Business opportunities &

change

e-Businessprocesses

e-Business Technology layer

Conceptual architectureof a business strategy


What is a Business Model anyway?A business model is not a description

of a complex social system itself with all its actors, relations and processes. Instead it describes the logic of a “business system” for creating value, that lies behind the actual processes.

A business model is the conceptual and architectural implementation of a business strategy and represents the foundation for

the implementation of business processes Business

Processes

Business Model

Strategy

Bu

siness Im

pact


Conceptualization Conceptualizations of business models try to

formalize informal descriptions into building blocks and their relationships . While many different conceptualizations exist, Osterwalder proposed a synthesis of different conceptualizations into a single reference model based on the similarities of a large range of models, and constitutes a business model design template which allows enterprises to describe their business model:


Osterwalder Conceptualization

Business model design template: Nine building blocks and their relationships, Osterwalder


4 parts to the business modelPart 1- The offering – this is what the business

produces and sellsValue proposition: The value proposition is a

description of the products and services the business offers and why customers will be compelled to buy them. The value proposition describes the problem the customers are experiencing and how the products and services being offered will help solve that problem. It describes how the features and characteristics of the products and services will contribute to the solution of the customers’ problem.


4 parts to the business modelPart 2- Infrastructure– This is the part of the business that creates

expenses. This part describes the basic facilities, skills, manpower, partnerships, and production process needed to exploit the business opportunity.

Core capabilities: The capabilities and core competencies necessary to operate the business. This includes land, facilities, equipment, personnel and their required skills needed to produce the products or services described in the value proposition.

Partner network: The business alliances needed to operate the business. Most businesses need alliances, agreements, licenses, or other third party assistance (legal, accounting, insurance, security, etc.) which are usually purchased from specialized service providers.

Value configuration: The process by which the products or services are produced and presented to the customer. The value configuration describes how the materials, supplies, and other required resources will be obtained and transformed into usable products or services and how they will be made available to buyers. It describes the process that will be used to produce the products and services described in the value proposition.


4 parts to the business modelPart 3- Customers– this is the part of the business

that generates revenue. Target customer: The demographics, purchasing

patterns, and location of the potential buyers of the products described in the value proposition.

Distribution channel: The means by which the business delivers products and services to customers. This includes the business's marketing and distribution strategy.

Customer relationships: The process of interacting with the business’s customers. It includes communicating, selling, supporting, and assisting customers purchase and use the business’s products or services.


4 parts to the business modelPart 4- Finances – this is the part of the business that

determines its financial performance and profit Investment: The investment needed to obtain the facilities,

equipment, and working capital to begin or sustain operations. This should include an itemization of these expenses and sources of financing to obtain these funds and when they will be required.

Cost structure: The expenses required to produce the products or services described in the value proposition. It should include an itemization of the expenses required by expense category and the assumptions made to estimate these expenses.

Revenue: The income a business receives from the sales of its products or services. This includes sales volume and revenue projections and the assumptions and logic used to make these projections.

Profit, return on investment, and cash flow.


Six Components of the Business Model

Henry Chesbrough and Richard S. Rosenbloom , Harvard Business School


Value Proposition

• A description of the customer problem

• The solution that addresses the problem

• The value of this solution from the customer's perspective


Market Segment

• Recognizing that different market segments have different needs

• Sometimes the potential of an innovation is unlocked only when a different market segment is targeted


Value Chain Structure

• The firm's position in the value chain • Activities in the value chain• How the firm will capture part of the value that it creates

in the chain.


Revenue Generation and Margins

• How revenue is generated (sales, leasing, subscription, support, etc.)

• The cost structure• Target profit margins.


Position in the Value Network

• Identification of competitors• Identification complementors• Identify network effects that can be

utilized to deliver more value to the customer

• linking suppliers and customers


Competitive Strategy

• How will the company attempt to develop a sustainable competitive advantage?

• How will it use that advantage to improve the enterprise's competitive position in the market?


Business Model vs. Strategy Henry Chesbrough and Richard S. Rosenbloom

Strategy Business Model Building a sustainable competitive advantage

Value creation and how it will be captured by the firm

Delivering the business value to the shareholders

An architecture for converting innovation to economic value for business(business value)

Depends on a more complex analysis that requires more certainty in the knowledge of the environment

Assumes a limited environmental knowledge


The Business Model and the Business PlanThe business model is the centerpiece of the business

plan but is not the entire business plan. The business plan should include additional information such as:

Administrative information Company name and address Company phone number including area code Email address, URL, and Logo if applicable Names, titles, addresses, and phone numbers of the owners

or corporate officers Month and year in which this business plan is issued Name of the business plan preparer Date when business was started or estimated start date


The business model and the business plan-cont’d

Purpose of the business and why it should be successful. Business objectives – what the company wants to accomplish (market

share, sales volume, revenue, return on investment, etc) The marketing plan. The competitive strategy describing how a sustainable competitive

advantage will be obtained. Management, the people who will manage the company and their

experience. Personnel plan describing the number and skills of the employees and

how they will be hired and compensated. A schedule describing when investment funds will be needed and for

what purpose, the sources of these funds and how they will be repaid. Annual revenue, expense, and cash flow projections and

assumptions upon which they are based, and critical milestones that will define progress and results.

Three year pro forma income statements, balance sheets, and cash flow statements.


Case Study

Business model design template: Nine building blocks and their relationships, Osterwalder


Case StudyHenry Chesbrough and Richard S. Rosenbloom , Harvard Business School


References and further readings Afuah, A. 2004, Business models: A Strategic Management Approach, McGraw-Hill, Irwin. Afuah, A. & C.L. Tucci 2001, Internet Business Models and Strategies, McGraw-Hill, Irwin. Amit, R. & C. Zott 2004, Business Strategy and Business Model: Extending the Strategy-Structure-Performance Paradigm , Strategic

Management Journal, 22, 493-520. Brandenburger, AM. & H. Struart 1996, Value-based Business Strategy, Journal of Economics and management strategy, pp. 5-25. Hamermesh, RG. & P. W. Marshall 2006, Building a Business Model and Strategy: How they Work Together, Harvard business School Press. Hart, Myra M. & Victoria W. Winston & Kristin J. Leib 2004, Mavens and Moguls: Creating a New Business Model, Harvard Business

Review. Lambert, S. 2003, A Review of Electronic Commerce Literature to Determine the Meaning of the Term ‘Business Model’, School of

Commerce Research Paper Series, London. Magretta, Joan 2002, Why Business Models Matter, Harvard Business Review. Mintzberg, H. 1994, The Rise and fall of Strategic Planning, Free Press, New York. Porter, M. E. 1985, Competitive advantage: Creating and Sustaining Superior Performance, Free Press, New York. Saloner, G. Shepard & J. Podolny 2001, Strategic Management, John Wiley & Sons, London. Shafer, S. & H. Smith & J. Linder (2005), The Power of Business Models, Business horizon, Elsevier, Vol. 48, pp. 199-207. Simon, H. 1997, The New Science of Management Decision. Prentice-Hall, Englewood Cliffs, New Jersey. Stabell, CB. & O. D. Fieldstad 1998, Configuring Value for Competitive Advantage: on Chains, Shops and Networks, Strategic Management

Journal, Vol. 19, pp. 413-437. Thompson, J. D. 1967, Organization in action. McGraw-Hill, Irwin. Timmers, P. 1998, Business Models for Electronic Markets, Electronic Markets 8, 3-8. Venkatraman V. & J. C. Henderson 1998, Real Strategies for Virtual Organization, Sloan Management Review, Vol. 40, No. 1, pp. 33-48. The Business Model Ontology - A Proposition In A Design Science Approach, Thesis by Alexander Osterwalder , 2004 Gill, H.: The Case for Enterprise Business Model Management. DM Review ,2000 Hawkins R. The “Business Model” as a Research Problem in Electronic Commerce. STAR (Socioeconomic Trends Assessment for the digital

Revolution) IST Project, Issue Report No. 4, SPRU –Science and Technology Policy Research, 2001 Pigneur Y. The E-business Model Handbook. HEC Working Paper ,2000 Chesbrough, Henry and Richard S. Rosenbloom, , 2000. “The Dual-Edged Role of the Business Model in Leveraging Corporate Technology

Investments,” in NIST Report GCR 00-787, Managing Technical Risk – Understanding Private Sector Decision Making on Early Stage Technology-based Projects, Lewis Branscomb, principal investigator