The Relevance of Business Model in the Current Era
- 5.M. Riad Shams1, Demetris Vrontis2, Yaakov Weber3, Evangelos Tsoukatos4, and Gabriele Santoro3
- 1Newcastle Business School, Northumbria University, Newcastle upon Tyne, UK 2 University of Nicosia, Nicosia, Cyprus 3College of Management, Rishon LeTsiyon, Israel 4University of Applied Sciences Crete, Greece 5University of Turin, Turin, Italy
With the increasing globalization and the rise of the digital economy, the traditional approach to business has undergone deep changes. In this scenario, organizations around the world need to improve products, services and business processes in order to compete and be sustainable in the long run. This is true for all types of organizations: both profit and nonprofit, and small and large.
In fact, while for-profit organizations need to face increasing competition by improving processes and products, nonprofit organizations need to be economically sustainable in order to survive and in order to not destroy value for several stakeholders (Thrassou, et al., 2018). In short, all types of organizations need to operate through an effective and efficient formula, which goes beyond the success of mere products and services (Santoro et ah, 2017; Zott et ah, 2011). This formula has been called “business model” by scholars, experts and practitioners; it consists of many and complex elements, forming a system that can be the key driver of competitive advantage. In fact, the business model regards the formula used by the organization to produce and capture value (Zott & Amit, 2008).
However, we live in an era increasingly affected by globalization and technological development, which generate dynamism in all sectors and industries. Therefore, the formula of success must be changed and adapted constantly, leveraging on what the market requires, the emerging needs, the establishment of new relationships along value chains and the usage of new technologies.
For all these reasons, the literature has begun to place more emphasis on how value is created (business model) than on the products and services marketed. In fact, it is increasingly recognized that companies compete at a business model level, rather than at product/service level (e.g. Johnson et al., 2008). In fact, there is an increasing awareness that similar products and services can achieve different results if marketed through different business models.
The concept of business model has become increasingly popular as internet-based companies like Facebook, Instagram and Spotify have conquered the world with their formula, based on the exploitation of open and networked platform and the usage of data as a key resource to monetize. Business models are particularly useful when explaining more complex business interrelationships that generate value and profits for more parties than just a buyer or seller.
The business model of a company is important, as it concerns the way through which a product or a technology is commercialized and creates value (Baden-Fuller & Flaefliger, 2013). In fact, a product or a technology itself does not create value without an effective and valuable business model. More specifically, a business model is the way through which the value proposition is articulated, the target market is identified and the revenue mechanisms, as well as the structure of the whole value chain, are defined (Chesbrough & Rosenbloom, 2002). Similarly, a business model can be defined as the logic according to which a company operates and creates value for all the stakeholders. For example, AirBnB has been successful also thanks to the creation of value for those who rent houses, which are able to achieve substantial revenue thanks to the network effect offered by AirBnB and the easy seal- ability offered by the platform. In line with this, Spotify offers value to musicians, democratizing music and allowing unknown artists to make their music known in a simpler and more accessible way than in the past.
In a nutshell, the business model phenomenon plays a key role both in the management of companies and in recent management studies as it allows us to understand the nature and sources of value creation in businesses. This chapter aims to introduce what the existing literature suggests in terms of business model and business model innovation, and then present new contexts of analysis in which the business model should be studied.
Business Model: Theoretical Foundations
The business model has played an important role in recent management studies. In fact, only recently has the business model been discussed in a structured and continuous manner (Frank et al., 2019). According to this, the first studies made an attempt at defining the business model and understanding its fundamental elements. For example, Lindgardt et al. (2009) indicate that a business model is composed of two main elements, namely the value proposition and the operating model. The first contains the target segments, the product or service offered and the revenue model. The second consists of the value chain, the cost model and the organization.
From a similar perspective, a business model describes a value proposition for customers and other participants, an arrangement of activities that produces this value, and associated revenue and cost structures (which finally must guarantee an economic sustainability) (Osterwalder Sc Pigneur, 2010).
Recently, Trott (2017) has provided a more structured view of the business model, stating that it describes business transactions and interrelationships among various parties and can be explained in terms of three interrelated components:
- • Value creation: A key part of a business models describes what is offered and how value is thus created for the various parties involved: customers, partners and other participants. The main concern here is thus the targeted customer segment and how their needs are fulfilled and their problems solved but also how to create value for any other parties involved.
- • Value configuration: This element explains how various interdependent resources and activities in the value chain underlie the value proposition: for example, technology, equipment, facilities, brands and managerial processes. These factors are part of an activity system that not only explains what activities create value, but how they are linked and what participants perform them. While this system is centered on the organization it can also involve activities conducted by customers, partners, and other participants.
- • Value capture: This last factor describes the cost structure of resources and activities and the revenue stream from customers and any other parties. In addition, this component shows how the value created will be apportioned between the organization and any other stakeholders involved. For a company, then, this last component also describes how profit is made while for nonprofits and the public sector there are of course no expectations of financial gain.
All these elements can be summarized by using the business model canvas (BMC) framework (Osterwalder & Pigneur, 2010). The BMC is a strategic tool for developing new business models or documenting and improving existing ones. Giants like P&G, GE, Nestle among others use the BMC to discuss their existing and new businesses in a structured and tangible manner. It helps a company align its activities by understanding the potential trade-offs. BMC is a great tool that offers focus, flexibility and transparency. BMC in a single page explains the core elements that drive the business and leaves out all the unnecessary stuff. The BMC is easier to tweak and far more lucid and coherent.
The right side of the BMC is focused on the customer, while the left side on the business. The right and left side come together with value propositions in the center to signify the exchange of value between your business and rhe customers. More specifically, the BMC is made up with
the following elements:
- • Customer Segments: For whom are you creating value? What products and services are you offering to each customer segment? The output should be a list of targets. You should be thorough with what these targets think and feel about your product.
- • Value Propositions: What value are you going to deliver to the customer? Which customer needs are you addressing? The value propositions can either be quantitative (price, efficiency) or qualitative (customer experience). The output should be a list of value propositions arranged by priority, which are then linked to the applicable targets.
- • Channels: Which channels are to be focused on to reach the desired customer segments? How are those channels integrated? Which ones are the most cost effective? A company can reach its clients either through its own channels or partner channels. The output should be a list of all channels that are then linked to the corresponding segments.
- • Customer Relationships: What type of relationship do you maintain with each customer segment? What are the expectations of your customers? How to establish them? What would be the associated costs? You can decide what relationship you want to have with the customers. As a company, you can opt for dedicated personal assistance, self-service, automated services, co-creation etc.
- • Revenue Streams: What are the customers willing to pay and for what value? How would they prefer to pay? How are they currently paying? How does each stream add up to the total revenue? There are various ways to generate a revenue stream for your company such as asset sales, subscription fees, leasing, licensing, advertising etc. These revenue streams should be linked to the targets and the value propositions.
- • Key Activities: What key activities do your value propositions require? Your distribution channels? Customer relationships? Revenue streams? These include your product distribution, research and development, human resource management.
- • Key Resources: What key resources do your value propositions require? Your distribution channels? Customer relationships? Revenue streams? These can be things like your office, hosting requirements, human resources, transportation, electricity etc. These resources should be linked to the key activities.
- • Key Partners: Who are your key partners? Your key suppliers? Which key resources are you acquiring from them? Which key activities do your partners perform? Key partners are the external companies or suppliers that you would need to perform your key activities and deliver value to the customers. Buyer-seller relationships are necessary to optimize operations and reduce the risks associated with a business.
You can form business alliances with your partners through joint ventures and strategic alliances as well. Just like the key resources, these key partners should be mapped to the key activities too.
• Cost Structure: What are the most important cost drivers in your business model? Which key resources and activities are the most expensive? Your business can be either cost driven or value driven. A cost-driven company looks to minimize all costs while a value-driven company is more focused on delivering great customer value in terms of quality or prestige.