What Is A Business Model Business Essay

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According to Verstraete and Jouison-Laffitte (2011), the expression Business Model is a buzz term. Indeed, it has been largely used and spread in our economic environment. The literature research on Business models had shown a wide diversity in the use and definitions of the term. We will try to present a review, first of all to clarify the concept which generates a fuzzy environment due to the huge amount of academic publications concerning this topic. Timmers (1998), Amit & Zott (2001) and Magretta (2002) are the most cited authors on the literature.

Timmers' work is the first academic publication on this topic; this is probably why it is so popular.

This term became fashion, since the emergence of the new technologies in the late 90's. This concept was mainly used to qualify new IT companies which the way they were making profit was not very understandable. The rise of the BM notion is also explained by technological, economical and regulatory changes which had a huge impact on the IT domain (Rédis, 2009).

What is a Business Model?

The literature is full of information about this topic, written by journalists, business people academics etc… but the concept of Business Model is still not very understood and a lot of divergent information can be found on this research area (Linder and Cantrell, 2000).

Osterwalder (2004) considers that authors use an incomplete approach which results in a disparity of conception. Some of them talk about the Business Model considering only the revenue generation aspect and others are focusing more on the value chain.

This is done by a tacit way, so we are sometimes confused and it seems they are not writing about the same subject.

The Porter's value chain concept is often used to justify the pertinence of the Business Model but he refuses to accept this "new" concept. He criticised the concept on its lack of clear definition. It is too reducer for him and doesn't take enough strategic parameters (Porter, 2001).

The term Business Model is widely used only since few years and seems to be a young phenomenon but in fact the first use of this expression appeared in an academic publication (Bellman and Clark, 1957).

But in fact, the first Business Model emerged in the early twentieth century but wasn't named like that. It was called 'the model of blades and razor'.

The principle was to sell a product at a very low cost, sometimes even losing money then charge very high sums for the purchase of refills or any complementary products or services (Lichy and Kachour, 2013).

Many examples exist such as mobile phones and packages, printers and consumables (cartridges etc). A variant of this model is the company that offers free software to read the files in a certain format and invoice software that lets you create files in this format.

In the 1950s, new models appear with companies such as McDonald's and Toyota.

In the 1970s, innovation comes from supermarkets (Wal-Mart in the United States and Carrefour or Auchan in France).

In the 1980s, it was Blockbuster, Intel and Dell, and in the 1990s, Southwest Airlines, Starbucks and Amazon.com.

Overview of academic definitions

According to Fayolle (2012), the BM is a source of inspiration and a thought-provoking, which helps managers in their decision process. It orients the action and the behaviour.

For Lequeux and Saadoun (2008), it is the decision of a company to generate profit.

"A business model consists of four interlocking elements that, taken together, create and deliver value. The most important to get right, by far, is the first: -Customer Value Proposition -Profit formula -Key processes -Key resources" (Johnson et al, 2008).

"A business model reveals the content and structure of transactions designed so as to create value via the development of business opportunities." (Amit and Zott, 2001).

"We characterize the business model of a company as a system manifested in the elements and related material and cognitive aspects. Key components of the business model include the company's network of relationships, operations embodied in the company's business processes and resource base, and the finance and accounting concepts of the company." (Tikkanen et al, 2005).

Hedman and Kalling (2001) noticed that BM was often used to describe the fundamentals component of an activity. The way the term is employed in company goes in that direction.

Indeed, when firms describe their BM, they often only talk about their products and the definition of their offer.

Definitions of Timmers (1998), Amit & Zott (2001) and Magretta (2002)) articulate the following elements: architecture and supply resources implemented the value proposition for the customer, the company's position in the value network, the revenue model.

For Afuah and Tucci (2001), the BM is what allows companies to have a sustainable competitive advantage to do better than their competitors in the long-term.

Rappa (2000) suggests classifying Business Models into ten different types:

Roles of Business Models

Beyond the understanding of the BM, authors are concerned about how the business model could be used, especially by companies.

The BM is assigned different roles and its importance makes it a concept whose

handling can be as profitable as risky. The literature also points, in a dynamic perspective, the importance for companies to design good BM and to know how to change them, depending on the market evolution.

To find a good and appropriate Business Model has a positive effect on the performance, but this performance can carry on if the company knows how to modify it. A static conception of the BM is a serious mistake from companies (Linder and Cantrell, 2001).

Coming back to the story of the American Express creation, Magretta (2002) shows the success of this BM. It was a better payment alternative than existing solutions for travelers.

Thus, developing a BM returns to "write a new story," a story of how the company works. This story, if it is similar to other older ways of doing business can distinguish two levels. It can either design a solution to fit a need still unmet, or to imagine a new way of making, selling or distributing an offer already established.

As such, the BM allows to understand, capture, visualize the logic of a business,

to make sense and reduce ambiguity (Osterwalder, 2004).

For Chesbrough (2003), the most important role of BM is to create a simplified cognitive map of the technical field for inputs (technical managers) and social field for outputs (marketing managers).

In recent studies, Chesbrough and Schwartz (2007) questioned specifically the role of BM in new business partnerships. By illustrating their remarks by examples of the business world (Millenium Pharmaceuticals, Go, P & G ...), they show that to define and implement collaborative projects, there are four steps.

First of all, we must ask ourselves the objectives targeted in the collaboration.

These objectives can be to increase profitability, reduce time-to-market, bring out the innovation capacity, creating a better flexibility in research and development (R & D). It must then, according to them, determine the capacity and if the capacity in R & D fundamental, critical and contextual. The alignment of the BM's partners is also to study. It is the pledge of the complementarities of the partners involved in co-development. The last step is to anticipate future collaborations in order to properly manage the relationship because we should not stay focused only on the current partnership. If all seems consistent Chesbrough does not explain whether the steps he proposes are from his own observation of successful partnerships or if he has been able to check the effectiveness of the approach in an empirical study.

We may regret this lack of justification.

Another key role is to assign the BM. Because it is also destined to be communicated, the BM is required to support the convictions of businesses (entrepreneurs or managers), helping them to make understand the logic of their business.

It can be used in particular to convince investors and can help prospecting and more generally all the contributors or resource holders (Verstraete and Jouison, 2007).

The Business Model has also a role of an analysing tool, by support to taking decision process. Moreover, Morris et al (2005) sees the BM as a guide to conduct companies' activities. It can provide some parameters to determine if the different strategic actions are appropriated.

The concept of the Business Model

Approaches of the Business Model

D'un point de vue managérial, le concept de BM apparaît également comme une source de créativité intéressante. D'une part, il pousse celui qui le mobilise à sortir des évidences de son secteur et à envisager toutes les sources potentielles de revenus ou les nouvelles façons de répartir la valeur à partir du déploiement de ses ressources actuelles. Par exemple, les stakeholders d'une entreprise sont souvent considérés comme donnés. Or, c'est le BM qui détermine largement quels acteurs jouent un rôle central pour l'entreprise.

Revenue model

The Business Model of company can also be seen as a generated revenue method.

It's a way for the company to make profit and to deal with economic actors (Rappa, 2000).

Alt and Zimmermann (2001) underlines that BM are linked to the choices of the company to generate revenues. These choices are mainly the investments the firm has to do.

Considering the income as a goal of the Business Models, authors insert a temporal dimension. In other words, it is not enough to generate revenues, they have to be a long-term interest, and therefore, the company is maintained thanks to them.

The revenues' generation comes from different sources for the company, but the main one is the customers. These revenues come from the products and/or services the company provides on the market. The offer is mainly for the clients whom accept to pay for it because it is something valuable for them. But companies do not create value only for their customers but also for all the stakeholders (Chesbrough, 2007).

Value creation

In most of the concept found on the literature, the value notion is probably the most important. Create, generate, capture, share are some verbs which are associate with this notion in the literature. The Business Model focuses more on the exchange of the value; it does not matter if it is generated or captured.

The logic core of value creation is the essence of the BM (Timmers, 1998).

Introduce some flexibility in the BM from the design is the proposal proposed by Chesbrough (2003). For this author, set up a BM as changeable in their design is an innovation in itself. The BM helps to create and capture more value in promoting the genesis of new ideas. Innovative companies must take technical decisions on the identification of missing elements- internal or external - allowing them to deploy new ideas from intern or extern research (Chesbrough, 2003).

Nevertheless, all authors agree to put, the creation of value for the company itself, at the centre of the BM concept. Second of all, the value is for the customers and for all the stakeholders.

Value for customers

Morris et al (2005) describes the different elements that have to be taken into account: the nature and the size of the market in which the company will compete.

They also mentioned its place in the value chain and the characteristics of its customers (B2B and B2C).

According to Morris et al (2005), the BM allows to understand how the company will differentiate its offer which will be perceived as unique on the market.

This will be possible by how the company will use its fundamentals competencies to create his own value. This is why managers have to identify key differences that the company is able to maintain on the long-term.

Studies on loyalty show that customers need to perceived on products and/or services, a different value from a company, he will become loyal (Trinquecoste, 1996).

Value for stakeholders

The offer allows generating a flow of revenues for the company thanks to the value created for the customers but also for investors, employees, suppliers, shareholders etc… (Amit and Zott, 2001).

Many other authors integrate to their work on the BM the identification of stakeholders in the process of value creation.

Morris et al (2005), considers that the value is not creating for but by the stakeholders (suppliers and business partners).

Verstraete and Jouison (2007) also adopt the stakeholders as the creation of value but integrate the shareholders, investors and banks to this term.

To obtain from them the resources the company is looking for, managers will have to show them the BM is well structured and will allow them to gain a part of the value created.

Value for e-business companies

Many authors agree to consider that the Business Model allows approaching the creation of value in e-business companies.

Value creation of e-business exceeds the value which can be achieved across the value chain, the building of strategic networks between business or operation of specific core competencies. These companies innovate through new mechanisms and new exchange transaction structures absent from more traditional businesses. Two results emerge from the study of Amit and Zott (2001).

First, four potential sources of value are present in e-business such as the efficiency of transaction synergies (all goods produces more value than the sum of the value of each individual asset), the capture (customer engagement in repeated transactions) and the novelty (New products / services, new methods of production, marketing, new ways of doing business that is to say, in the structure of transactions).

Then it appears an interdependence between these sources of value, the presence of each source can increase the efficiency of others. The transaction or exchange of value is an analysis unit that integrates the various values sources identified.

Transaction content concerned goods or information exchanged, thus resources and capacity to enable the exchange. The structure of the transaction refers to involved parties in the transaction and the links between them. It also includes the order in which exchanges take place and the mechanism adopted that allows transactions. Governance of the transaction refers to control by different parts of the flow of information, resources and property. It also relates to the form the company's legal and incentive systems to put in place for participants transactions (Osterwalder et al. 2005). The BM can improve the measurement, observation and comparison of the logic business of a company.

Business Model and Strategy

There is often confusion between these two terms and companies use these concepts without knowing the differences. A company has a unique strategy because this is how the firm is anchored in the competitive context but many different Business Models can be defined. This is also why several companies can use the same BM.

Shafer et al. (2005) and other authors consider the Business Model as the effectuation of the company strategy. The main difference for them is the operational dimension of the BM which isn't encountered in the strategic concept.

On the other hand, thinking in terms of BM can be seen as a potential source of strategic failure in a sector. Thus, the BM of Dell, in the computer industry has created a strategic break that allowed the company to become the PC manufacturer leader. Indeed, avoiding the use of traditional retailers, Dell has modified the distribution of income to his advantage (Amit & Zott, 2001).

In the strategic aspect, the customer value is very important and Porter (1999) tells that this value is born by the influence of the value chain of a company on its customers.

For the customers, this influence allows them to reduce their costs and to increase their performance. Still for this author, the customer value is a factor of differentiation on the market.

The value chain allows the analysis of the competitive advantage which can be seen under three elements: advantage by costs, differentiation and innovation.

But the BM is less preoccupied by the competitive advantage then the strategy. (Porter, 1999).

A new BM can then be seen as a strategic innovation.

Indeed, the approach in terms of BM requires the manager to understand the business value of its network by identifying the different stakeholders involved in the creation of value and modes of governance in place to exploit a resource.

Creativity generated by thinking in terms of BM should not systematically relate this concept to one field.

Instead, it must accompany any strategic thinking and not be limited to emerging activities. Indeed, nothing prevents its mobilization in mature industries where managers wish to change their sources of income (Brandenburger & Nalebluff, 1997).

Linder and Cantrell (2001) defend the fact that the BM is not only for specialized in web companies. Indeed, many authors consider that Business Model is for this type of companies and "real" companies have strategies. They are complementary: a Business Model is not a substitution of the strategy and conversely. The BM can be considered as daily guiding the firm and the strategy is more on a long-term aspect (Timmers, 1998).

The strategy integrates trends and the positioning on the market and also establishes a structure to make profit in a changing environment. For this author, the BM can easily be changed based on market evolutions and new opportunities indicating by the strategy.

D'un point de vue plus théorique, le concept de BM présente plusieurs intérêts. Tout d'abord, il est parcimonieux et peut se définir de façon précise, notamment par rapport à celui de stratégie. Ensuite, il est généralisable. Issu, comme nous l'avons souligné, de la vague Internet, le concept est aujourd'hui mobilisé dans des secteurs plus traditionnels. Il n'est donc pas l'apanage des seuls e-business. Enfin, le troisième intérêt théorique du concept est de fournir une vision renouvelée de certaines problématiques ou notions utilisées en stratégie. La notion de client se définit ainsi dans notre approche par toute organisation ou individu qui fournit à l'entreprise focale un revenu et non plus uniquement comme celui qui consomme le produit ou service de l'entreprise. Une approche BM permet également de rendre compte de la valeur captée par l'entreprise et simplifie le dilemme fréquemment posé par la distinction entre valeur générée et valeur captée par l'entreprise (Bréchet et Desreumaux, 2001). Si l'on retient la définition de la valeur de Porter (la valeur se mesure par le revenu), on considère alors que le revenu d'une entreprise correspond à la valeur qu'elle a captée (Schéma 2.). De plus, le BM permet également d'associer dans la réflexion choix stratégiques, sources de revenus et structure de coûts. Ainsi, une position de spécialiste dans un système de valeur (Porter, 1985) permet d'avoir besoin de moins de revenus pour la supporter et de mieux valoriser une compétence centrale. Cependant, elle limite aussi du même coup les gisements de revenus. Ainsi, si l'intégration verticale est privilégiée dans différentes théories comme un moyen d'accroître le pouvoir de négociation (Porter, 1980) ou de réduire les coûts de transaction dans certaines conditions (Williamson, 1975, 1985), c'est aussi un moyen de multiplier les gisements de revenus.

New Business Models

Evolution of Business Models

The Business Model of an organisation has brought a change during his life cycle.

To survive and to prosper, a company has to drive the change and not endure them to be able to keep a strong position regarding the competition.

In a similar perspective, the time pacing is recommended by Eisenhardt et al (1998).

It is for companies operating in unstable environments do not wait until events occur (movement of a competitor, change in customer behavior, etc.)but to program changes - especially in terms of products - defining the rate at which they must occur. This idea was particularly integrated by Benavent and Verstraete (2000) in their consideration of the BM.

Emergence of new Business Models

Applegate (1999) defines five steps allowing companies to analyse the emergence of new Business Models:

- Analysing existing BM to better understand them,

- Identifying possible evolution trails and conceivable new BM

- Ranking of these possibilities in priority order (evaluation of the concept, capacity and resources required, proposition of value)

- Use of the previous step to develop driving tools performance,

- Revision of the strategy and the business plan

She suggests these steps but does not give any examples or further explanations.

Among influencing factors, the most important, according to Weill and Vitale (2002) are the role of technology in the implementation of business processes.

The influence of ICT on the development of these processes has also been highlighted by Tapscott (2004). They touch the deep structure of business models and make them evolve. Strategy, BM and technology are inseparable. The best models are based on the detention by the companies of the most efficient technologies.

The combination of information technology helps to determine which BM remembers for the future. (Weill and Vitale, 2002).

They can be used extensively to improve gradually the entire value chain, processes and therefore to refine the BM.

Emergence of the digital technology

Different factors are quoted in the literature that can possibly influence the evolution of the Business Model. The main one seems to be the environment which applies constant pressure on BM of companies:

- Technologic changes

- Competitive evolution

- Demand changes

- Social and legal evolutions