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Business model

A business model describes how an organization creates, delivers, and captures value,[2] in economic, social, cultural or other contexts. For a business, it describes the specific way in which it conducts itself, spends, and earns money in a way that generates profit. The process of business model construction and modification is also called business model innovation and forms a part of business strategy.[1]

In theory and practice, the term business model is used for a broad range of informal and formal descriptions to represent core aspects of an organization or business, including purpose, business process, target customers, offerings, strategies, infrastructure, organizational structures, profit structures, sourcing, trading practices, and operational processes and policies including culture.

History[edit]

Over the years, business models have become much more sophisticated. The bait and hook business model (also referred to as the "razor and blades business model" or the "tied products business model") was introduced in the early 20th century. This involves offering a basic product at a very low cost, often at a loss (the "bait"), then charging compensatory recurring amounts for refills or associated products or services (the "hook"). Examples include: razor (bait) and blades (hook); cell phones (bait) and air time (hook); computer printers (bait) and ink cartridge refills (hook); and cameras (bait) and prints (hook). A variant of this model was employed by Adobe, a software developer that gave away its document reader free of charge but charged several hundred dollars for its document writer.


In the 1950s, new business models came from McDonald's Restaurants and Toyota. In the 1960s, the innovators were Wal-Mart and Hypermarkets. The 1970s saw new business models from FedEx and Toys R Us; the 1980s from Blockbuster, Home Depot, Intel, and Dell Computer; the 1990s from Southwest Airlines, Netflix, eBay, Amazon.com, and Starbucks.


Today, the type of business models might depend on how technology is used. For example, entrepreneurs on the internet have also created new models that depend entirely on existing or emergent technology. Using technology, businesses can reach a large number of customers with minimal costs. In addition, the rise of outsourcing and globalization has meant that business models must also account for strategic sourcing, complex supply chains and moves to collaborative, relational contracting structures.[6]

Applications[edit]

Malone et al.[20] found that some business models, as defined by them, indeed performed better than others in a dataset consisting of the largest U.S. firms, in the period 1998 through 2002, while they did not prove whether the existence of a business model mattered.


In the healthcare space, and in particular in companies that leverage the power of Artificial Intelligence, the design of business models is particularly challenging as there are a multitude of value creation mechanisms and a multitude of possible stakeholders. An emerging categorization has identified seven archetypes.[21]


The concept of a business model has been incorporated into certain accounting standards. For example, the International Accounting Standards Board (IASB) utilizes an "entity's business model for managing the financial assets" as a criterion for determining whether such assets should be measured at amortized cost or at fair value in its International Financial Reporting Standard, IFRS 9.[22][23][24][25] In their 2013 proposal for accounting for financial instruments, the Financial Accounting Standards Board also proposed a similar use of business model for classifying financial instruments.[26] The concept of business model has also been introduced into the accounting of deferred taxes under International Financial Reporting Standards with 2010 amendments to IAS 12 addressing deferred taxes related to investment property.[27][28][29]


Both IASB and FASB have proposed using the concept of business model in the context of reporting a lessor's lease income and lease expense within their joint project on accounting for leases.[30][31][32][33][34] In its 2016 lease accounting model, IFRS 16, the IASB chose not to include a criterion of "stand alone utility" in its lease definition because "entities might reach different conclusions for contracts that contain the same rights of use, depending on differences between customers' resources or suppliers' business models."[35] The concept has also been proposed as an approach for determining the measurement and classification when accounting for insurance contracts.[36][37] As a result of the increasing prominence the concept of business model has received in the context of financial reporting, the European Financial Reporting Advisory Group (EFRAG), which advises the European Union on endorsement of financial reporting standards, commenced a project on the "Role of the Business Model in Financial Reporting" in 2011.[38]

value propositions

target customer segments

distribution channels

customer relationships

value configurations

core capabilities

commercial network

partner network

cost structure

revenue model

Auction business model

All-in-one business model

Chemical leasing

business model

Low-cost carrier

Loyalty business models

Monopolistic business model

business model

Multi-level marketing

business model

Network effects

Online auction business model

Online content business model

Premium business model

Professional

open-source model

business model

Pyramid scheme

Razor and blades model

Servitization of products business model

Subscription business model

Network Orchestrators Companies

Virtual business model

In the early history of business models it was very typical to define business model types such as bricks-and-mortar or e-broker. However, these types usually describe only one aspect of the business (most often the revenue model). Therefore, more recent literature on business models concentrate on describing a business model as a whole, instead of only the most visible aspects.


The following examples provide an overview for various business model types that have been in discussion since the invention of term business model:


Other examples of business models are:

Business reference model

Technology centric communities have defined "frameworks" for business modeling. These frameworks attempt to define a rigorous approach to defining business value streams. It is not clear, however, to what extent such frameworks are actually important for business planning. Business model frameworks represent the core aspect of any company; they involve "the totality of how a company selects its customers defines and differentiates its offerings, defines the tasks it will perform itself and those it will outsource, configures its resource, goes to market, creates utility for customers, and captures profits".[57] A business framework involves internal factors (market analysis; products/services promotion; development of trust; social influence and knowledge sharing) and external factors (competitors and technological aspects).[58]

Related concepts[edit]

The process of business model design is part of business strategy. Business model design and innovation refer to the way a firm (or a network of firms) defines its business logic at the strategic level.


In contrast, firms implement their business model at the operational level, through their business operations. This refers to their process-level activities, capabilities, functions and infrastructure (for example, their business processes and business process modeling), their organizational structures (e.g. organograms, workflows, human resources) and systems (e.g. information technology architecture, production lines).


The brand is a consequence of the business model and has a symbiotic relationship with it, because the business model determines the brand promise, and the brand equity becomes a feature of the model. Managing this is a task of integrated marketing.


The standard terminology and examples of business models do not apply to most nonprofit organizations, since their sources of income are generally not the same as the beneficiaries. The term 'funding model' is generally used instead.[60]


The model is defined by the organization's vision, mission, and values, as well as sets of boundaries for the organization—what products or services it will deliver, what customers or markets it will target, and what supply and delivery channels it will use. Mission and vision together make part of the overall business purpose. While the business model includes high-level strategies and tactical direction for how the organization will implement the model, it also includes the annual goals that set the specific steps the organization intends to undertake in the next year and the measures for their expected accomplishment. Each of these is likely to be part of internal documentation that is available to the internal auditor.

Business Model Adaptation[edit]

As a specific instance of Business Model Dynamics, a research strand derived from the evolving changes in business models, BMA identifies an update of the current business model to changes derived from the context. BMA can be innovative or not, depending on the degree of novelty of the changes implemented. As a consequence of the new context, several business model elements are promoted to answer those challenges, pivoting the business model towards new models. Companies adapt their business model when someone or something such as COVID-19 has disrupted the market. BMA could fit any organization, but incumbents are more motivated to adapt their current BM than to change it radically or create a new one.[69]

A. Afuah and C. Tucci, Internet Business Models and Strategies, Boston, McGraw Hill, 2003.

T. Burkhart, J. Krumeich, D. Werth, and P. Loos, Analyzing the Business Model Concept — A Comprehensive Classification of Literature, Proceedings of the International Conference on Information Systems (ICIS 2011). Paper 12.

http://aisel.aisnet.org/icis2011/proceedings/generaltopics/12

H. Chesbrough and R. S. Rosenbloom, The Role of the Business Model in capturing value from Innovation: Evidence from XEROX Corporation's Technology Spinoff Companies., Boston, Massachusetts, Harvard Business School, 2002.

Marc Fetscherin and Gerhard Knolmayer, Focus Theme Articles: Business Models for Content Delivery: An Empirical Analysis of the Newspaper and Magazine Industry, International Journal on Media Management, Volume 6, Issue 1 & 2 September 2004, pages 4 – 11, September 2004.

George, G., Bock, AJ. Models of opportunity: How entrepreneurs design firms to achieve the unexpected. Cambridge University Press, 2012,  978-0-521-17084-0.

ISBN

J. Gordijn, Value-based Requirements Engineering - Exploring Innovative e-Commerce Ideas, Amsterdam, Vrije Universiteit, 2002.

G. Hamel, Leading the revolution., Boston, Harvard Business School Press, 2000.

J. Linder and S. Cantrell, Changing Business Models: Surveying the Landscape, Accenture Institute for Strategic Change, 2000.

and Jørgensen, R., M.-S. Li, Y. Taran, K. F. Saghaug, "Towards a new generation of business model innovation model", presented at the 12th International CINet Conference: Practicing innovation in times of discontinuity, Aarhus, Denmark, 10–13 September 2011

Lindgren, P.

Long Range Planning, vol 43 April 2010, "Special Issue on Business Models," includes 19 pieces by leading scholars on the nature of business models

S. Muegge. Archived 2021-12-31 at the Wayback Machine. Technology Innovation Management Review Archived 2021-03-10 at the Wayback Machine, April 2012, pp. 5–16.

Business Model Discovery by Technology Entrepreneurs

S. Muegge, C. Haw, and Sir T. Matthews, , Best of TIM Review, Book 2, Talent First Network, 2013.

Business Models for Entrepreneurs and Startups

Alex Osterwalder et al. , Co-authored with Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2009

Business Model Generation

O. Peterovic and C. Kittl et al., Developing Business Models for eBusiness., International Conference on Electronic Commerce 2001, 2001.

Alt, Rainer; Zimmermann, Hans-Dieter: Introduction to Special Section – Business Models. In: Anniversary Edition, Vol. 11 (2001), No. 1. link

Electronic Markets

Santiago Restrepo Barrera, Business model tool, Business life model, Colombia 2012, (Spanish)

http://www.imaginatunegocio.com/#!business-life-model/c1o75

Paul Timmers. , Electronic Markets, Vol 8 (1998) No 2, pp. 3 – 8.

Business Models for Electronic Markets

and M. R. Vitale, Place to space: Migrating to eBusiness Models., Boston, Harvard Business School Press, 2001.

Peter Weill

C. Zott, R. Amit, & L.Massa. 'The Business Model: Theoretical Roots, Recent Developments, and Future Research', WP-862, IESE, June, 2010 - revised September 2010 ()

PDF

Magretta, J. (2002). Why Business Models Matter, Harvard Business Review, May: 86–92.

Govindarajan, V. and Trimble, C. (2011). The CEO's role in business model reinvention. Harvard Business Review, January–February: 108–114.

van Zyl, Jay. (2011). : using innovation to make your mark in a connected world. Chapter 7 Towards a universal service delivery platform. San Francisco.

Built to Thrive

Media related to Business models at Wikimedia Commons

, Ithaka, November 2009. Overview of the models being deployed and analysis on the effects of income generation and cost management.

Sustaining Digital Resources: An on-the-ground view of projects today