Business Model Innovation Basics

The business model

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.

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" in thinking in terms of business models, without seriously asking myself what the term "business model" actually meant. I was later able to find this phenomenon again with numerous other entrepreneurs. Perhaps it is because the term "business model" seems so self-explanatory. In my research work, I dared a simple test on this 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 lengthy silence, followed by a few half-sentences. Unsurprisingly, this caused little joy among 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 business models? If you want to write about this scientifically, you will quickly discover that there is not yet one universal answer to this question. On the contrary, different authors shed light on different aspects, elements and functions of business models. Even worse, numerous authors on the topic of business models do not offer a definition at all. In my opinion, this is a clear sign that the topic is still relatively young. In the following, I will try to illuminate the concept of business model from different angles in order to then present a reasonably universal definition.

Business model functions

Of central importance is the question of which Function a business model exerts; in two respects. 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 is what the concept of business model can be used for. Three basic functions can be identified here.

Link between technology and strategy

It has always been a central challenge for the management of a company to ensure that the work performed follows the strategic corporate goals. This can prove to be unexpectedly difficult even for smaller companies. However, at the latest when (complex) technologies, such as digital technologies, come into play, this can become a truly Herculean task.

Driven by the need to model and understand complex, software-driven business processes, numerous entrepreneurs and scientists started thinking about the topic of business models around the turn of the millennium. On the one hand, it was necessary to convince investors of novel business approaches. On the other hand, solutions were needed to map strategic goals in the associated IT infrastructure. So, if you will, 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. business models has led to numerous company bankruptcies. This development is also known today as the DOT-COM bubble.

The business model as a competitive advantage

In my view, the most interesting, but possibly also the most difficult to grasp function of business models is their strategic use for 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 intermediary platforms as an example. In purely technical terms, 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 their users, their market participants, or even in 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 where business model frameworks are used to think up new business models. In practice, however, I am not aware of any case where formulated or visualized business models are used to explain a business approach in a running company. It is difficult to say why this is so. 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

Having looked at functions of business models, I now want to explore the question of what elements make up a business model. In my view, four main elements can be identified around the term Values group. In this context, the term "values" is to be understood very broadly. Values can be haptic goods, cash, helpful contacts, a good reputation, and much more. Moral values can also be of advantage or disadvantage.

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 comes with a promise, namely the promise to fulfill the value proposition ? or better yet, to exceed expectations. Personally, I am not a big fan of the ?USP thinking? 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 oriented towards the mainstream?

Value Creation Mechanism

As already mentioned, anyone who promises a value proposition should also fulfill it. The underlying mechanism can be quite sophisticated, especially when digital technologies are used. So, in the simplest case, it is a matter of so-called "make or buy decisions". Beyond that, however, in many cases the processes behind value creation can be distributed, automated, or even outsourced.

Profit Formula and Finances (Value Capture and Finances)

This element in the business model covers all issues relating to a company's finances and how money is earned. Here, too, the concept of value is of central importance. 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 time and earnings is often desirable, but it also harbors the greatest risks.

Value Network

This somewhat ominous element in the business model is an invitation to look closely at where even less obvious values are exchanged everywhere. 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 true. For example, serving customers in certain industries or being known for particularly polluting practices can be harmful. The important thing is to identify the values that flow back and forth and use them to advantage where possible.

Properties of business model elements

A final insight into the elements of business models is that they cannot be considered on their own. Business model elements influence each other and have dependencies on each other. This is exactly what makes the business model concept special, but also makes it seem particularly complex.

The business model defined

Now that we have dealt with the functions of business models and the elements of business models, I would like to venture a business model definition. It should be noted that the business model represents a holistic view of a company. It is superordinate, highly simplified, but complete. So, with some scientific pretension, 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, comprised of four value-orientated elements namely: value proposition, value network, value creation mechanism, and value capture and finances; which when deployed at different firm levels can act in a business function capacity as a communication tool, a mediator between strategic objectives and technology, and/or a source of competitive advantage.

Hagl and Duane, 2018

In more practical terms, the concept of a business model can be expressed 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 interrelated 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.


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.