Business Models

Why use the term ‘business model’ (henceforth BM), especially when there has been substantial disappointment and disillusion with its use and its association with the tech stock bubble, Enron, World.com and the failure of the banking business model (see Chapter 8)? Although the term business model is associated with ‘disappointment and disillusion’, we argue in this chapter that there are strong reasons why a reworked BM conceptual framework can support innovative and insightful critical reflection(s) about the possibilities and limitations of economic transformation. There are many definitions of ‘shareholder value’ and so it is also with business models. Business models have become a short-hand for the way in which products, services, business processes and organization functions such as information systems, marketing and distribution might be reworked to transform firm, industry and national economic performance. In the literature the terminology used to construct BMs varies across academic disciplines such as information systems, strategy, innovation studies and entrepreneurship. The result is that there are substantial differences in scope and purpose attached to the BM concept because it is applied in many different contexts. In an extensive review of the BM concept, Osterwalder et al. (2005) usefully classify the existing definitions into three broad generic approaches according to level of application and abstraction. Thus a BM can be viewed as: i

an overarching conceptual framework for describing all real world businesses at the most abstract level;

ii

a classification scheme for describing different types of generic business models with common business characteristics, such as the banking, pharma, e-business and no-frills air-travel business models; or

iii

specific operational business models in the real world, such as the Dell or Amazon business models.

In this text we argue that a loose BM conceptual framework should provide an overarching abstraction about the real world, generate a system of classification and reveal the specific activity characteristics of focal firms in their business model. The loose conceptual framework developed in this text incorporates three elements: structure, purpose and evaluation. In terms of structuring business models we first draw upon the notion of a BM located in an information genotype where focal firms share a similar stakeholder information network.

One of the first definitions that became popular was proposed by Timmers (1998). He defined a business model as ‘an architecture for the 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 revenues.’ This definition has also influenced the definition of Weill and Vitale (2001) and is also very similar to the definition of Mahadevan (2000). These conceptualizations see the business model as an architecture and address the business network with a focus on the different roles of the actors and their interactions. A network approach is also very explicit in Tapscott’s definition (2001) and his work on business webs (Tapscott, Lowy, & Ticoll, 2000).

(https://www.smartservicescrc.com.au/PDF/Business%20Service%20Management%20Volume%203.pdf" xmlns:xlink="https://www.w3.org/1999/xlink">https://www.smartservicescrc.com.au/PDF/Business%20Service%20Management%20Volume%203.pdf) Second, we argue that business models should be granted a sense of strategic purpose which Chesbrough suggests is one of value creation and value capture.

Chesbrough (2006) states that a business model performs two important functions: value creation and value capture. First, it defines a series of activities that will yield a new product or service in such a way that there is net value created throughout the various activities.

(https://eprints.qut.edu.au/41609/1/Business_Service_Management_Volume_3_Mar2011_Understanding_Business_Models_Final.pdf" xmlns:xlink="https://www.w3.org/1999/xlink">https://eprints.qut.edu.au/41609/1/Business_Service_Management_Volume_3_Mar2011_Understanding_Business_Models_Final.pdf) In this text, we argue, that the general purpose of a business model is to sustain a financial surplus from operations (for liquidity) and generate ongoing (re)capitalization (for solvency) for focal firms located within its boundary (although we also accept that there will be exceptions to this, for example, the small and medium enterprise (SME) bio-pharma business model is about cash burn rather than augmenting cash surpluses and capitalization although this may not be sustained indefinitely (Haslam et al., 2011)). Third, we incorporate Magretta’s (2002) view about evaluation, whether the story about a business model makes sense and how financial numbers provide a useful resource upon which to construct alternative critical narratives (Froud et al., 2006). Magretta refers to ‘tying narrative to numbers’ and states that there are two tests for a business model: the narrative test (‘the story doesn’t make sense’) and the numbers test (the profit and loss doesn’t add up).