Are you a manager in a company or an entrepreneur looking for ideas on how to develop your business model? Then you've come to the right place! In this article I start with the basics around the topic of business model innovation.
Before thinking about innovating a business model, it makes sense to ask yourself what a business model actually is. In my early entrepreneurial years, I always "believed" I was thinking in terms of business models without seriously asking myself what exactly the term "business model" actually meant. I later found this phenomenon in numerous other entrepreneurs. Perhaps it is because the term "business model" seems so obvious and self-explanatory. In my research work, I dared to conduct a simple test in the form of two questions. Question one: "Are business models important?". This was almost always answered with a clear "yes". Question two: "How do you define your business model?". This was usually followed by a long silence, followed by a few half-sentences. Unsurprisingly, this didn't bring much joy to my interviewees, so I soon decided to remove these two questions from my interview guide. So if you want to annoy your colleagues or boss, just give these two questions a try.
Good. Let's try the scientific approach. What is the definition of a business model? If you want to write about this scientifically, you will quickly realize that there is not yet a universal answer to this question. On the contrary, different authors shed light on different aspects, elements and functions of business models. Worse still, many authors on the subject of business models offer no definition at all. In my opinion, this is a clear sign that the topic is still relatively new. In the following, I will try to shed light on the concept of the business model from various angles in order to present a reasonably universal definition.
Functions of business models
Of central importance is the question of which Function a business model in two ways. Speaking as an entrepreneur, the first question is what effect a particular business model has on and/or for my company. Speaking as a theorist, the question arises as to what the concept of a business model can be used for. Three basic functions can be identified here.
Link between technology and strategy
It has always been a key challenge for the management of a company to ensure that the work performed is in line with the company's strategic objectives. This can prove unexpectedly difficult, even for smaller companies. However, at the latest when (complex) technologies, such as digital technologies, are used, this can become a truly Herculean task.
Driven by the need to model and understand complex, software-driven business processes, numerous entrepreneurs and scientists began thinking about business models around the turn of the millennium. On the one hand, there was a need to convince investors of new business approaches. On the other hand, solutions were needed to map strategic goals in the associated IT infrastructure. So if you like, the cradle of the popularity of the business model approach lies in the advent of the Internet age. At this point, it should be noted that a certain initial euphoria about Internet technologies and "infinitely scalable" business models led to numerous company bankruptcies. Today, this development is also known as the DOT-COM bubble.
The business model as a competitive advantage
In my opinion, the most interesting, but possibly also the most difficult to understand function of business models is their strategic use for a competitive advantage. Traditionally, for example, companies have been able to secure a competitive advantage through superior technologies that are difficult to replicate. However, a novel configuration in the business model can also create novel competitive advantages.
Let's take online portals, networks, digital marketplaces or brokerage platforms as an example. Technically speaking, developing a network like Facebook, a search engine like Google, a platform like eBay or an online marketplace like Amazon is "not particularly difficult". What is almost impossible, however, is to compete with an already established portal. This is because the value of these portals lies beyond their technology, namely in the number of users, their market participants or the data they collect.
The business model as a communication tool
A third function of business models can be identified in the literature: the business model as a communication tool. The idea behind this is that a formally created and/or visualized business model is used to explain the business approach to employees, investors and other stakeholders.
As desirable as this is, in my experience this idea is rather theoretical. Yes, there are workshops in which business model frameworks are used to devise new business models. In practice, however, I am not aware of any cases in which formulated or visualized business models are used to explain a corporate approach in a running company. It is difficult to say why this is the case. In my opinion, however, there are numerous opportunities for the use of business model theory in corporate management or for the development of new products.
Elements of business models
Now that we have dealt with the functions of business models, I would like to look at the elements that make up a business model. In my opinion, there are four main elements that can be identified around the term Values group. In this context, the term "values" is to be understood very broadly. Values can be tangible goods, cash, helpful contacts, a good reputation and much more. Moral values can also be advantageous or disadvantageous.
Value Proposition / Value Promise
Probably the most frequently cited business model element is the value proposition. What value does a company offer? Anyone who has dealt with investors has probably been asked "what is your value proposition?"; "what is your USP?". "USP" in this context stands for "Unique Selling Proposition"; another way of asking what is special about the business model.
In my opinion, it is often forgotten that every value proposition presented is accompanied by a promise, namely the promise to fulfill the value proposition - or even better, to exceed expectations. Personally, I'm not a big fan of the "USP mindset", because with the idea of differentiation ("unique"), business models automatically reorient themselves to what already exists. In other words: "if you are against the mainstream, you are also aligned with the mainstream".
Value Creation Mechanism
As already mentioned, anyone who promises a value proposition should also fulfill it. The underlying mechanism - especially when using digital technologies - can be quite sophisticated. In the simplest case, it is therefore a matter of so-called "make or buy decisions". In many cases, however, the processes behind value creation can also be distributed, automated or even outsourced.
Profit Formula and Finances (Value Capture and Finances)
This element of the business model encompasses all issues relating to a company's finances and how money is earned. The concept of value is also of central importance here. The question that arises in the business model is what value do I offer my customers and how much of it can I "cut off"? The greatest possible decoupling of working hours and earnings is often desirable, but also harbors the greatest risks.
Value Network
This somewhat ominous element in the business model is an invitation to take a closer look at where even less obvious values are being exchanged. Product for money - that's easy to understand. But what value does it have, for example, to have a renowned company as a customer, to be perceived as innovative, or to be CO2-neutral? The opposite can also be the case. For example, serving customers in certain industries or being known for particularly environmentally damaging practices can be damaging. It is important that the values that flow back and forth are identified and used to advantage where possible.
Properties of business model elements
A final insight into the elements of business models is that they cannot be considered in isolation. Business model elements influence each other and are interdependent. This is precisely what makes the business model concept special, but also makes it appear particularly complex.
The business model defines
Now that we have dealt with the functions of business models and the elements of business models, I would like to attempt a definition of a business model. It should be noted that the business model represents a holistic view of a company. It is overarching, highly simplified, but complete. With a somewhat scientific approach, I define the business model as follows:
Business models can be defined as simplified but complete, holistic and dynamic representations of how a company operates, consisting of four value-oriented elements, namely: value proposition, value creation mechanism, profit formula and value network; which, when deployed at different levels of the organization, can act as a communication tool, a link between strategic objectives and technology and/or a source of competitive advantage.
Translated from Hagl and Duane, 2018
In more practical terms, the concept of a business model can be formulated as follows:
A business model is a simplified but complete representation of how a company works. This holistic approach consists of four value-based elements that are interlinked and interdependent (value proposition, value creation, profit formula, value network). The business model can act as a link between technology and strategy, as a source of competitive advantage, or as a communication tool.
So much for the topic of business models. I will look at the basics of business model innovation in a later article.
Literature
Hagl, R. and Duane, A. (2018) Exploring the Impact of Augmented Reality and Virtual Reality Technologies on Business Model Innovation in Technology Companies in Germany. In: Australasian Conference on Information Systems. 2018, Sydney, Australia.