Usage and Potential of the Business Model Concept

(Excerpt from an article submitted to the CAIS)

Because business model research is a rather young research domain it still has to prove its relevance. Its main area of contribution could be in the creation of concepts and tools that help manager to capture, understand, communicate, design, analyze and change the business logic of their firm.

In the following sections we will outline some of the general roles that literature proposes for the business model concept (i.e. the use of formally described business models). We have identified five categories of functions, which are understanding & sharing, analyzing, managing, prospects and patenting of business models. In section IV we will specifically describe the business model concept's role in IS.

Understand and Share
The first area in which business models can contribute is in understanding and sharing the business logic of a firm. Concretely, business models help to capture, visualize, understand, communicate and share the business logic.
Capture. As explained earlier, the business model of a company is a simplified representation of its business concept. However, the business model is rarely explicitely described in a conceptual way. Experience shows that in many cases people are not always capable of communicating their business model in a clear way (Linder and Cantrell 2000). Furthermore, because people have different mental models they will not automatically understand the same thing under a business model. Thus, a generic and shared concept for describing business models becomes necessary. Such a framework can be understood as a common language between stakeholders to formulate business models in a way that everybody understands.

Visualize. Human's ability to successfully process complex information is quite limited. As can be shown theoretically and empirically, processing information through the visual system can substantially increase the degree to which complexity can be handled successfully (Rode 2000). Using a conceptualization to capture business models, means that with little additional effort they can be presented graphically (Gordijn and Akkermans 2003).

Understand. Nowadays business models are increasingly complex, particularly those with a strong ICT and e-business component. The relationship between the different elements of a business model and the decisive success factors are not always immediately observable. Therefore the process of modeling social systems and in this case business models help identifying and understanding the relevant elements in a specific domain and the relationships between them (Morecroft 1994; Ushold and King 1995). In addition, the visual representation of a business model can dramatically enhance understanding.

Communicate and share. We have already made a point that the business model concept helps capturing, understanding and visualizing the business logic of company. Being able to communicate and share this understanding with other stakeholders is simply a logical consequence of the foregoing. Formalizing business models and expressing them in a more tangible way clearly help managers to communicate and share their understanding of a business among other stakeholders (Fensel 2001). This is particularly important for the dialogue between people with different background, such as managers and systems architects and engineers.

The second area in which the business model concept can contribute is in analyzing the business logic of a company. The business model becomes an ew unit of analysis (Stähler 2002). Concretely, they can improve measuring, observing and comparing the business logic of a company.

Measure. Having captured the business model in a first step it may become easier to identify the relevant measures to follow in order to improve management. This would facilitate the choice of the indicators of an executive information system for monitoring the strategy implementation (Camponovo and Pigneur 2004), using for example a balanced scorecard approach with its financial, customer, internal business, and innovation perspectives (Kaplan and Norton 1992). This is all the more relevant since in e-business the indicators to follow are still an issue of debate.

Track & Observe. The business logic of a company constantly changes due to inside and outside pressures, as shown in section above. Therefore a structured approach to business models is important in order to understand which particular issues have changed over time.

Compare. Similar to observing a company's business model over time, a structured approach allows companies to compare their business model to the ones of their competitors. This is based on the reasoning that things are only comparable if they are seized and understood in the same way. Also, comparing one's business model to the one of a company in a completely different industry may help gaining new insights and foster business model innovation. Related to e-business and to dynamic industries this can help incumbents understand how aggressive new competitors and startups work.

The third area of contribution of business models is in improving the management of the business logic of the firm. The business model concept helps ameliorating the design, planning, changing and implementation of business models. Additionally, with a business model approach companies can react faster to changes in the business environment. Finally, the business model concept improves the alignment of strategy, business organization and technology.

Design. Designing a coherent business model where all the elements are mutually reinforcing or at least optimized is not an easy task. Nowadays business models are quite complex and their success is often based on the interaction of a number of apparently minor elements. This is even more the case since technology increases the range of imaginable business models (Lechner and Hummel 2002). Having a business model conceptualization at hand that describes the essential building blocks and their relationships will make it easier for managers to design a sustainable business model.

Plan, Change & Implement. When a company decides to adopt a new business model or to change an existing one, capturing and visualizing this model will improve planning, change and implementation (see Figure 7). It is much easier to go from one point to an other, when one can exactly understand, say and show what elements will change. In this regard, Linder and Cantrell (Linder and Cantrell 2000) speak of so-called change models that are the core logic for how a firm will change over time to remain profitable in a dynamic environment.

Figure 7: Planning, Changing and Implementing Business Models

React. Capturing, mapping and understanding creates the foundation for improving speed and appropriateness of reaction to external pressures. A conceptualized business model helps business model designers to easily modify certain elements of an existing business model (Petrovic, Kittl et al. 2001). This is without doubt essential in an uncertain and rapidly changing competitive landscape.

Align. We argued earlier that the business model concept can serve as a federator between the triangle of business strategy, business organization and technology. In other words, the business model forms a sort of conceptual bridge that makes it easier to align these three. Chesbrough and Rosenbloom (2000), for example, see business models as a mediating construct between technology and economic value. The business model concept could become an important tool to further develop and improve existing methods of business and IS alignment (Osterwalder and Pigneur 2003).

Improve decision-making. Having claimed that the business model concept enhances understanding and communicating the business logic of the firm we deduce that decision makers make more informed, and hence, better decisions business model and decision making (Hayes and Finnegan 2005). Asides from this, business models are a new unit of analysis (Stähler 2002) that can be observed and compared, help defining measures and should therefore also improve decisions.

A fourth area of contribution of business models refers to the possible futures of a company. We believe that the business model concept can help foster innovation and increase readiness for the future through business model portfolios and simulation.

Innovate. Similar to the argument of improving change and increasing reaction capacities in the firm, We believe that a formal and modular business model approach can foster innovation. In fact, specifying a set of business model elements and building blocks, as well as their relationships to each other, is like giving a business model designer a box of Lego stones. He can play around with these stones and create completely new business models, limited only be his imagination and the pieces supplied. Amit and Zott (2001) explicitly perceive the business model as a locus of innovation. Mitchell and Coles (2003) even see business model innovation as a source of competitive advantage.

Business model portfolio. Based on Allen's law of excess of diversity in evolutionary theory (Allen 2001) one may argue that it could be interesting for a company to maintain a portfolio of business models in order to be ready for the future. The idea behind Allen's law is that a sustainable and successful evolutionary strategy requires an amount of internal diversity superior to that of the environment. Allen suggests that agents need to have a stock of potential strategies to be set off in the face of unpredictability in environmental change (Andriani 2001). In the case of a company this would mean having a stock of business models in order to cope with change.

Simulate and test. Simulating and testing business models is obviously the dream of every manager. Though simulation will never be able to predict the future, it is a way of doing risk free experiments, without endangering an organization (Sterman 2000). By simulating and testing possible business models, managers will be better prepared for the future. Similarly, in the domain of e-business Richards and Morrison (2001) compare this kind of simulation tool to a sort of flight simulator that allows building better e-business strategies.

Increasingly entrepreneurs and companies in e-business have the possibility to patent e-business processes and even entire aspects of their business model (Beresford 2001). Therefore business modelling may potentially have an important role to play in this legal domain. For example, Priceline based much of its business strategy on a patent whose technology matches bids from buyers with interested sellers on the Net (Angwin 2000). Consequently, patenting of e-business methods has also started to create a number of legal battles. A famous one is the case between the online retailer and the online arm of the bookseller Barnes & Noble (B&N)., who received a patent for its "one-click" ordering system attacked B&N for patent infringement, supposedly caused by its "express lane" checkout system on the B&N website (Lesavich 2001). It remains to be seen in what direction patenting business models and business processes moves.