Business Model - Flinders University

A Review of the Electronic Commerce Literature to Determine the Meaning of the Term ‘Business Model’. Susan Lambert School of Commerce Flinders University of South Australia SCHOOL OF COMMERCE RESEARCH PAPER SERIES: 03-5 ISSN: 1441-3906

Abstract In the electronic commerce literature there is confusion as to the meaning and purpose of the term ‘business model’.

There are wide ranging

perceptions of the term causing many to wonder just what a business model is. Definitions vary as do the designated attributes of business models thereby creating problems for academics and professionals relying on the literature for guidance in understanding business models. This paper presents and analyses the definitions of ‘business model’ presented in the electronic commerce literature along with the designated business model attributes. The typologies and taxonomies of business models present in the literature are examined and evaluated.

It is

concluded that until there is some consensus as to the definition of ‘business model’ and the attributes agreed upon, useful taxonomies of business models would not be forthcoming. Introduction A term that is used extensively in the electronic commerce literature is the term ‘business model’.

It has become a buzzword amongst electronic commerce

academics and business professionals. Like many buzzwords though it’s meaning has become blurred with individuals attaching different meanings to it to suit their needs. The term ‘business model’ 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 try to define the term but do refer to business models and/or taxonomies of business models (Bambury, 1998; Saloner and Spence, 2002; Chen, 1

2001). Others such as 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. Many authors use the terms ‘business model’, ‘e-business model’ or ‘Internet business model’ interchangeably.

For the purposes of this paper it is not important to

distinguish between traditional and web based businesses as the term ‘business model’ applies equally to both. The aim of this paper is to explore the literature for the meaning of the term ‘business model’ and to determine the attributes afforded business models. Furthermore, this paper reveals the shortcomings of business model taxonomies and other classification methods presented in the literature. Business Model Definitions Derived from the Literature There exists no generally accepted definition of business model in the electronic commerce literature. The term is defined differently by many authors and there is little consensus as to the attributes of business models. Timmers (1999:p32) observes that “ The literature about Internet electronic commerce is not consistent in the usage of the term ‘business model’ and moreover, often authors do not even provide a definition of the term”. Table 1 lists fourteen different definitions of business model. 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 and Rosenbloom, 2002; Gordijn et al, 2000a&b; Weill and Vitale, 2001; Elliot, 2002; Hawkins, 2002). Rayport and Jaworski (2001:pxiv) add to the confusion in the preface to their book 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

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architecture, a path, a specification or a description, exists for every firm; it is just a matter of articulating it. Table 1: Definitions of Business Models

“An architecture for product, service and information flows, including a description of the various business actors and their roles; and a description of the potential benefits for the various business actors; and a description of the sources of revenue.” Timmers (1999; p32) “…a business concept that has been put into practice.” Hamel (2000: p66) “An important part of an e-commerce information systems development process is the design of an e-business model. Such a model shows the business essentials of the e-commerce business case to be developed. It can be seen as a first step in requirements engineering for ecommerce information systems.” “…the main goal of a business model is to answer the question: “who is offering what to whom and expects what in return”. Therefore, the central notion in any business model should be the concept of value” Gordijn, Akkermans and van Vliet (2000a) “…very precise way [of highlighting the way of doing business] because stakeholders such as chief executive officers, marketers and business developers should agree on it, and because it is a crucial bottom line part of the requirements for an electronic commerce system”. Gordijn, Akkermans and van Vliet (2000b) “…a Business model is a description of how your company intends to create value in the marketplace. It includes that unique combination of products, services, image, and distribution that your company carries forward. It also includes the underlying organization of people, and the operational infrastructure that they use to accomplish their work” KMLab Inc., 2000, in Chesbrough and Rosenbloom, 2002), “ In the most basic sense, a business model is a method of doing business by which a company can sustain itself- that is, generate revenue. The business model spells out how a company makes money by specifying where it is positioned in the value chain”. Rappa (2003) “…the method by which a firm builds and uses its resources to offer its customers better value than its competitors and to make money doing so….. A business model can be conceptualised as a system that is made up of components, linkages between components, and dynamics.” Afuah and Tucci (2001; p3) An Internet business model is defined by the same authors as, “…the method by which a firm plans to make money long-term using the Internet…The Internet business model is the system-components, linkages, and associated dynamics- that take advantage of the properties of the Internet to make money” Afuah and Tucci (2001: p6) “A description of the roles and relationships among a firm’s consumers, customers, allies, and suppliers that identifies the major flows of product, information, and money, and the major benefits to participants.” Weill and Vitale (2001:p34) “A loose conception of how a company does business and generates revenue”, Porter (2001:63) “A business model is nothing else that an architecture of a firm and its network of partners for creating, marketing and delivering value and relationships capital to one or several segments of customers in order to generate profitable and sustainable revenue streams.” DubossonTorbay, Osterwalder and Pigneur (2002:p7) “A business model is a description of the commercial relationship between a business enterprise and the products and/or services it provides in the market.” Hawkins (2002:p3) 3

Table 1: (cont)

“…a method of doing business by which a company generate revenue to sustain itself. The model spells out how the company is positioned in the value chain.” Turban, Lee, King and Chung (2002:p6) “A business model is an abstraction of a business identifying how the business profitably makes money. Business models are abstracts about how inputs to an organization are transformed to value-adding outputs.” Betz (2002:p1) “Business models specify the relationships between different participants in a commercial venture, the benefits and costs to each and the flow of revenue. Business strategies specify how a business model can be applied to a market to differentiate the firm from its competitors.” Elliot (2002:p7) “A business model is a path to a company’s profitability, an integrated application of diverse concepts to ensure the business objectives are met. A business model consists of business objectives, a value delivery system, and a revenue model.” Krishnamurthy (2003:p14)

The choice of descriptor does not present a real issue in understanding business models although it can create confusion in the first instance.

A study of the

definitions reveals that all authors are intending that the business model depict the way the business operates. An examination of table 1 reveals that the definitions do differ significantly in scope. At one extreme the business model is said to contain detail of the internal workings of the business including operational and organisational infrastructure along with how the business intends to create value and distribute it. (KMLab Inc., 2000, in Chesbrough and Rosenbloom, 2002) Those who see the business model as equivalent to the enterprise model support this view. Persson and Stirna’s survey revealed that enterprise modelling was useful in creating “a multifaceted ‘map’ of the business as a common platform for communicating between stakeholders.” (Persson and Stirna, 2000). 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 system. The other perspective of business models that emerges from the literature focuses only on the relationship of the business with other entities in the value network. 4

(Timmers, 1999; Rappa, 2003; Weill and Vitale, 2001; Elliot, 2002; Turban et al, 2002; Hawkins, 2002). This abstract notion of how the business operates within its value network recognises that the business model must be considered together with the marketing model, (Timmers, 1999) and the business strategy (Elliot, 2002; Weill and Vitale, 2001). Timmers (1999) states that, “…it is useful, beyond business models, also to define ‘marketing models’.”, (Timmers, 1999:p32) implying that the marketing model is not part of 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. The common factor evident in all definitions contained in Table 1 is the requirement that the business model depict the business in relation to the other entities that form part of the value network.

Although some definitions are inclusive of internal

business processes and others are not, they all require a description of how the firm expects to generate revenue and how it relates to the other entities in the value network. This suggests that the essential focus of a business model is the interaction of the firm with its market place. Business Model Attributes Some definitions of business models are quite explicit in terms of their attributes however the more abstract definitions merely allude to the attributes that need to be included. Hamel captures the essence of a business model in his definition, …A business model is nothing more than a business concept that has been put into practice. (Hamel, 2000: p66) but does not provide any guidance as to what to include in the model itself. The KMLab Inc. (cited in Chesbrough and Rosenbloom, 2002) definition is at the other end of the spectrum, specifying in detail the many attributes that should be included in the business model

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Table 2: Attributes of Business Models Hamel (2000) Customer Interface: Fulfillment and support Information and insight Relationship dynamics Pricing structure Core Strategy: Business mission Product/market scope Basis for differentiation Strategic Resources: Core competencies Strategic assets Core processes Value Network: Suppliers Partners Coalitions Timmers (1999) Products, services and information flows. Business actors and their roles. Potential benefits for business actors. Sources of revenue. Weill and Vitale (2001) Major entities Firm of interest: Customers Suppliers Allies Major flows of: Products Information Money Revenues and other benefits to each participant

Rayport and Jaworski (2001) Value proposition or value cluster for targeted customers Marketspace offering – product, service, information Unique resource system Financial models

Hawkins (2002) Transaction mode Relationship between producer and user Revenue mode How revenue streams are generated and Exchange mode How the value of an item is determined and exchanged

Afuah and Tucci (2001) Customer value Scope (of market and products) Price Revenue sources Connected activities Implementation (organization structure, systems, people, and environment) Capabilities Sustainability (competitive advantage)

Chesbrough et al (2002) Articulate the value propositions Identify a market segment Define the structure of the value chain Estimate the cost structure and profit potential Describe the position of the firm in the value network Formulate the competitive strategy

Laudon and Traver (2001) Value proposition Revenue model Market opportunity Competitive environment Competitive advantage Market strategy Organizational development Management team

Dubosson-Torbay et al (2002) Product Innovation: Target customers Value proposition Capabilities Customer Relationship: Get a feel Serving Branding Infrastructure Management: Resources/Assets Activities/Processes Partner Network Financial Aspects: Revenue Profit Cost

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The remaining definitions also specify the required attributes but they differ in their view of what in fact should be contained in the business model and what should be left to other devices or tools such as business plans and marketing models. Table 2 is a compilation of the attributes that authors either specify in their business model definition or specify separately. Hamel (2000), Rayport and Jaworski (2001), Afuah and Tucci (2001), DubossonTorbay et al (2002), and KMLabs (cited in Chesbrough & Rosenbloom (2002) include in the business model, the resources and internal elements of the organisation required to operationalise the business model. The view taken by other authors (Gordijn et al, 2000a; Timmers, 1999; Weill and Vitale, 2001; Hawkins, 2002; Krishnamurthy, 2003) is to separate the business model from the operational requirements. Resources, organisation structure and strategy are dealt with separately. Weill and Vitale (2001), for example, 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. The attributes are derived from the business model definition even though they are not, in some cases, explicit in the definition. Where the definition extends to the inclusion of operational factors then attributes relating to these factors are required. Business Models Categories Identified in the Literature Many authors put forward categories of business models. They are referred to as taxonomies, categories, business types and business designs. Two broad categories that permeate the literature are: •

Presence in physical and/or Internet based markets i.e. pure-play or bricksand-clicks

•

Buyer type, (i.e. B2B, B2C, B2G, G2B, G2C, P2P).

Beyond these classifications based on transaction channel and customer type respectively, the consensus ends. Business models are classified according to degree

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of innovation and functional integration (Timmers 1999), the revenue model, value offering (e.g. information, product or service) and pricing model 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. Bambury (1998) offers an empirically derived taxonomy of both “transplanted realworld 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 models with no fewer than twenty-seven sub-categories. Rappa (2003) acknowledges that “Presently there is no single, comprehensive and cogent taxonomy of web business models one can point to.” Table 3 is a compilation of the business model categories identified in the literature. It indicates that authors take vastly different approaches to differentiating between business models. Authors including Weill and Vitale (2001), Schneider and Perry (2000) and Eisenmann (2002) have broad categories whereas others such as Rappa (2003) and Bambury (1998) distinguish business models on as little as one characteristic such as the pricing model or the nature of the product on offer. Kalakota and Robinson (1999) do not use the term ‘business model’, rather they list seven e-business designs that they then refine adding detail that relates to business strategy. Krishnamurthy (2003) does not provide a clear listing of business models, rather she distinguishes between pure-play and bricks-and-clicks business models and then identifies thirteen pure-play business models throughout her book. A study of these business model categories provides an awareness of the ways that businesses are utilising electronic commerce but they do not provide a framework by which business models can be compared. Hawkins (2002:p1,2) 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

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Table 3: Business Model Categories Bambury (1998) Translated RealWorld Business Models Mail-order model Advertising -based model Subscription model Free trial model Direct marketing model Real estate model Incentive scheme model B2B Combinations of the above models Native Internet Business Models Library model Freeware model Information barter model Digital products and digital delivery model Access provision model Website hosting and other models Kalakota & Robinson (1999) Category killer Channel reconfiguration Transaction Intermediary Infomediary Self-service innovator Supply-chain innovator Channel mastery

Timmers (1999) E-Shop E-procurement E-malls E-auctions Virtual Communities Collaboration Platforms Third-party Marketplaces Value-chain Integrators Value-chain Service Providers Information Brokerage Trust Services Weill and Vitale (2001) Content Provider Direct to Customer Full-Service Provider Intermediary Shared Infrastructure Value Net Integrator Virtual Community Whole-of enterprise/ Govt

Eisenmann (2002) Online Portals Online content providers Online retailers Online brokers Online market makers Networked utility providers Application service providers Turban et al (2002) Name your price Find the best price Affiliate marketing Group purchasing Electronic tendering system Customisation and personalisation Electronic marketplaces & exchanges Supply chain improvers Collaborative commerce Rappa (2003) Broker Buy/Sell Fulfilment Market Exchange Business Trading Community Buyer Aggregator

Distributor Virtual Mall Metamediary Auction Broker Reverse Auction Classifieds Search Agent Bounty Broker Advertising Model Generalized Portal Personalized Portal Specialized Portal Attention / Incentive marketing Free Model Bargain Discounter Infomediary Model Recommender System Registration Model Merchant Model Virtual Merchant Catalog Merchant Bit Vendor Click and Mortar Manufacturer Model Brand Integrated Content Community Model Voluntary Contributor Knowledge Networks Subscription Model Utility Model

Krishnamurthy (2003) Bricks-and-clicks Pure-play B2C Direct sellers Intermediaries Advertising-based models Community-based models Fee-based models B2B EDI/Extranets B2B Marketplaces C2C Auctions Peer-to-peer C2B Idea collectors Reverse auctions Complaint centres Paid advertising models

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more than random, unrelated lists of business activities that just happen to occur on Internet platforms.” This view is supported by the collection of business model categories listed in table 3, most of which are unstructured and appear to be developed in an ad hoc manner with no direct reference to the business model attributes proposed by the respective authors. Weill and Vitale (2001) do use a structured methodology in defining their eight ‘atomic e-business models’. Each model is significantly different to the others in terms of the established criteria outlined in table 2. The atomic business models are theoretically derived typologies rather than empirically derived taxonomies. Summary This paper has summarised the treatment of the term ‘business model’ in the electronic commerce literature. It has provided, in table 1, the definitions of business model and revealed that although definitions differ in scope they all require the inclusion of value network relations. The most prominent difference in the definitions is the inclusion or exclusion of internal operations and resources of the business creating a dichotomy of business model definitions. An analysis of business model attributes provided further understanding of the concept of ‘business models’. As with the business model definitions, two views are taken; those that include attributes relating to internal operations and those that propose only value network related attributes. Finally a survey of business model categories was conducted on the literature concluding that in the most part unstructured, ad hoc business model identification is present. A number of business model typologies are proposed along with taxonomies based on empirical data. The taxonomies are not highly structured in that they do not analyse business cases according to set criteria; rather, they describe them in unstructured text making comparisons between business models difficult. Weill and Vitale (2001) is the exception providing a structured analysis of eight ‘atomic’ business models.

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Structured taxonomical research is needed to provide a means of understanding existing business models and comparing their function. It should be possible to imply resource and organisational requirements that underlie the various business models. The constructs of the taxonomy should be derived from the business model attributes. The business model attributes should be derived from the business model definition. However, it is not surprising that there is a lack of such research since to date there is no consensus as to the meaning of the term ‘business model’.

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