Int. J. Competitiveness, Vol. 1, No. 2, 2017
Understanding business model – literature review of concept and trends Sandeep Goyal* and Amit Kapoor Institute for Competitiveness, U 24/8, DLF Phase 3, Gurgaon – 122 002, Haryana, India Email: sandy2u@gmail.com Email: sandeep.goyal@competitiveness.in Email: amit.kapoor@competitiveness.in *Corresponding author
Mark Esposito Division of Continuing Education, Harvard University, 51, Brattle Street, Cambridge, MA, 02138, USA and Grenoble Ecole de Management 12 rue Semard, 38000 Grenoble, France Email: markesposito@fas.harvard.edu
Bruno S. Sergi Department of Economics, University of Messina, Via T. Cannizzaro 278, 98122 Messina, Italy and Davis Center for Russian and Eurasian Studies, Harvard University, CGIS South Building, 1730 Cambridge Street, Cambridge, MA 02138, USA Email: bsergi@fas.harvard.edu Email: bsergi@unime.it Abstract: This article undertakes the literature review to understand the emerging trends on the conceptualisation of business model theme. The purpose of this article is to stimulate the reflective introspection towards the feasibility of theoretical grounding of business model concept based upon the comprehensive review of the existing academic literature around business model theme. Since 1990s, business model theme has received increasing attention as a recipe for competitive advantage among the academic and practitioner communities. However, despite the attention, business Copyright Š 2017 Inderscience Enterprises Ltd.
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S. Goyal et al. model theme still lacks consensus on different attributes like definition, components, theoretical baseline, configuration and applicability for the emerging economies. The purpose of this article is to synthesise the research literature on business model theme and provide the diagnostic outcome of the same in terms of future scope and trends. Keywords: business model; literature review; value creation; value proposition; value delivery; value capture; business model typologies. Reference to this paper should be made as follows: Goyal, S., Kapoor, A., Esposito, M. and Sergi, B.S. (2017) ‘Understanding business model – literature review of concept and trends’, Int. J. Competitiveness, Vol. 1, No. 2, pp.99–118. Biographical notes: Sandeep Goyal is a Research Fellow at Institute for Competitiveness, India. His primary research and teaching interests include competitiveness, creating shared value, social entrepreneurship, global business management, international marketing and strategic management. Amit Kapoor is an Honorary Chairman of Institute for Competitiveness, India and Affiliate Faculty, Microeconomics of Competitiveness, Institute of Strategy and Competitiveness, Harvard Business School. He holds PhD in Industrial Economics and Business Strategy and has received the ESSID Scholarship and MIT DCA Scholarship and Ruth Green Memorial Award. His research interest lies in the fields of enhancing competitiveness, competitive advantage and leveraging technology for success. Mark Esposito is a Senior Professor of Business and Economics at Grenoble School of Management in France and Senior Associate for the University of Cambridge Institute for Sustainability Leadership in the UK. He serves as a member of the teaching faculty for the Harvard University Extension School as well as Institutes Council co-Leader, at the Microeconomics of Competitiveness (MOC) program at Harvard Business School. Bruno S. Sergi is currently teaching international economics at the University of Messina. He serves as a Centre Associate of the Davis Center for Russian and Eurasian Studies at Harvard University. His primary research interest is international macroeconomics and the political economy of transition countries.
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Introduction
The dynamic global environment is undergoing a socio-economic transformation due to the emergence of new technologies, growth of m-commerce and e-commerce, high-growth emerging economies, global competition, global value chain, decreasing product life cycles, declining resource mobility barriers and solutions-based philosophy (Hitt et al., 1998; Ireland and Hitt, 1999; Markides, 1999; Hamel, 2000; Hamel and Prahalad, 2005; Nidumolu et al., 2009).
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The dynamic trends in competitive landscape call for measures, which lead to disruptive innovation of competitive logic regarding strategic positioning (Porter, 1996, 2001), value proposition, value creation, value delivery, value appropriation and future viability (Markides, 1997, 1999; Hamel, 2000). This dynamic environmental context and firm level complexities due to the global markets is driving the research towards better understanding of the firm level resources and activities required to manage these challenges (Foss, 1997). The focus on building the core activity set as a source of competitive advantage has resulted in the evolution of the strategic management literature from value chain analysis (Porter, 1985, 1996) to resource-based view (RBV) (Penrose, 1959; Wernerfelt, 1984; Barney, 2001; Grant, 1991; Peteraf, 1993; Rumelt, 1997) to business model view (Timmers, 1998; Amit and Zott, 2001; Afuah and Tucci, 2003; Osterwalder and Pigneur, 2010). The entry of the business model concept and terminology in the literature is attributed to the role of internet and e-business technologies in creating new forms of transactions during the 1990s (Timmers, 1998). The term business model gained prominence during the e-commerce boom in 1990s. The business model terminology has been used by managers, academicians and journalists for everything and anything related to the ‘new economy’, which is driven by information and communication technologies. However, the dotcom failure in the late 1990s has led to the rapid downturn of semi-formed conceptualisation of business model theme. The failure of dotcoms is associated with the ambiguity of the business model which “seems to refer to a loose conception of how a company does business and generates revenue” (Porter, 2001). This implies that business model theme still lacks a clear definition in the management literature (Alt and Zimmermann, 2001). The business model terminology has been used by the researchers and practitioners to describe the overall structure and activities, which are required to achieve a strategic outcome. Chesbrough (2007) defines business model as a combination of identifying the value offering, defining the target segment, setting up the value-chain for value creation and delivery, identifying the cost and revenue streams, and formalising the position and competitive strategy. Osterwalder and Pigneur (2010) argue that business model is like a blueprint for a strategy to be implemented through organisation structures, processes and systems. Business model describes the rationale of how an organisation creates, delivers, and captures value. The logic of business model has been defined from different viewpoints like combination of product, service and information flows (Timmers, 1998); integration of content, structure and governance (Amit and Zott, 2001); mediator between a technology and economic value creation (Chesbrough and Rosenbloom, 2002); mix of narrative (“How enterprise does business?”) and numbers (cost, revenue, profit and loss) (Magretta, 2002); conceptual and architectural blueprint of business strategy (Osterwalder and Pigneur, 2010); activity-based system (Afuah, 2004); combination of ‘who’, ‘what’, ‘where’, ‘when’, ‘why’, ‘how’ and ‘how much’ (Mitchell and Coles, 2004a, 2004b); strategic choice for value creation and value capture (Shafer et al., 2005); and blueprint for value creation, delivery and capture (Teece, 2010). The belief and interest in business model concept has grown rapidly among academicians and practitioners during the decade (2000–2010), both from the operational and strategic perspectives. The operational view of business model focuses on value creation and value capture logic whereas the strategic view of business model looks at the future viability and sustainability of value creation and capture (Morris et al., 2005).
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One of the key enablers for the recognition of strategic business model innovation involves the growing demands and potential business opportunities in the emerging economies, which comprise the large untapped market striving for basic solutions at BoP. The objective of this article is to stimulate the reflective introspection towards the feasibility of theoretical grounding of business model concept based upon the comprehensive review of the existing academic literature around business model theme. The article is organised in the following sections. The next section focuses on the review of the business model literature in terms of the key research areas like definition; components, configuration and typologies; relationship with strategy; business model innovation; business models in emerging markets, theoretical dimensions; and others like metrics, organisation structure and leadership. The subsequent sections focus on research implications and conclusions.
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Literature review
2.1 Methodology and organising framework The main focus during selection of articles for review has been on ensuring the representative selection of the business model related articles from the peer-reviewed journals. The approach has been kept simple to ensure that the quality and relevance of the research articles is not missed out by narrowing the focus on selective journals. The articles are selected based upon the keyword-based research across the EBSCO and ProQuest databases. These are the two major online databases comprising the large collection of published articles in business related disciplines. The authors used the following keywords for electing the relevant articles – ‘business model’, ‘strategic business’ and ‘business innovation’. The authors restricted the keyword search to the peer-reviewed and scholarly journals published in English.
2.2 Business model – key research areas From practitioner perspective, corporate executives have become increasingly focused on business model as a significant source of competitive advantage. According to EIU Executive Study (2005), majority of the corporate executives advocated new business models as a greater source of competitive advantage than new product or service offerings. The similar finding was presented by IBM Global CEO Study (2006), which stated that around 31% of the CEOs recognised business model innovation as one of the critical drivers for gaining competitive advantage as compared to product or service innovation. From academic perspective, the ongoing belief and focus on firm structure and external relationship as a source of competitive advantage has led to the evolution of the field of strategy from value chain analysis to RBV and finally business model innovation. Since 1990s, the business model theme has gained increasing focus and attention among the research community. However, still business model theme lacks theoretical standing and recognition in the field of strategy.
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This section focuses on the key research areas like business model definition, components, configuration and typologies; relationship with strategy; business model innovation; business models in emerging markets, theoretical dimensions; and others like metrics, organisation structure and leadership (Figure 1). Figure 1
Business model literature – research trends (see online version for colours)
2.2.1 Definition The business model definition has seen lot of variations and transformations linking it to the different operational and strategic components (Table 1). Business model is defined as the flow of information and transactions leading to the value creation and revenue generation for the involved actors (Timmers, 1998; Weill and Vitale, 2001). Another definition of the business model describes it as a mix of narrative and numbers. The narrative explains the relationships between actors and actions, while the numbers explain the details regarding cost and revenue types (Magretta, 2002). Osterwalder and Pigneur (2010) define business model as a combination of the value offering, value creation, value delivery and capture. The value offering involves description of the value a company offers to its one or several segments of customers. The value creation is linked to the architecture of the firm including key resources, key activities and partnerships. The value delivery comprises channels for creating, marketing and delivering the value and relationship capital. The value capture is linked to optimising the costs and maximising the revenue streams. Amit and Zott (2001) define business model as a combination of the transaction content, structure, and governance in a manner that it creates value through the exploitation of the business opportunities. One research perspective perceives business model as a business concept that explains the logic of value creation for a firm (Timmers, 1998; Hamel, 2000; Mitchell and Coles, 2004a, 2004b; Morris et al., 2005; Shafer et al., 2005; Teece, 2010). Another research perspective perceives business model as a link between strategy, business processes and information systems (Amit and Zott, 2001; Chesbrough, 2007; Osterwalder and Pigneur, 2010; Esposito et al., 2012). The primary difference between these two interpretations is
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regarding the relationship of the business model theme with the concepts of strategy, business processes, and ICT (Esposito et al., 2012). The first perspective embeds these three concepts related to the strategy, business processes and information systems in the description of the business model. The second perspective considers all these as separate, inter-linked components. In the latter case, business model is defined as the conceptual and architectural implementation of a business strategy, which links the business processes and information systems. Table 1
Business model literature – definition
Article
Definition
Timmers (1998)
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
Amit and Zott (2001)
Depicts the design of transaction content, structure, and governance so as to create value through the exploitation of business opportunities
Weill and Vitale (2001)
Description of the roles and relationships among a firm’s consumers, customers, allies and suppliers that identifies the major flows of product, information, and money, and the major benefits to participants
Chesbrough and Rosenbloom (2002)
Blueprint of how a network of organisations cooperates in creating and capturing value from technological innovation
Magretta (2002)
Stories that explain how enterprises work
Afuah and Tucci (2003)
Method by which a firm builds and uses its resources to offer its customers better value than its competitors and to make money while doing so. It details how a firm makes money now and how it plans to do so in the long term
Mitchell and Coles (2004a)
Combination of ‘who’, ‘what’, ‘where’, ‘when’, ‘why’, ‘how’ and ‘how much’ an organisation uses to provide its goods and service and develop resources to continue its efforts
Morris et al. (2005)
Concise representation of how an interrelated set of decision variables in the areas of venture strategy, architecture, and economics are addressed to create sustainable competitive advantage in defined markets
Shafer et al. (2005)
Representation of a firm’s underlying core logic and strategic choices for creating and capturing value within a value network
Morris (2009)
Description of a whole system, a combination of products and services delivered to the market in a particular way, or ways, supported by an organisation, positioned according to a particular branding that, most importantly, provides experiences to customers that yield a particular set of strong relationships with them
Demil and Lecocq (2010)
Refers to the articulation between different areas of a firm’s activity designed to produce a proposition of value to customers. This involves static and dynamic view. The static view details the blueprint for the coherence between core business model components. The dynamic view refers to a more transformational approach, using the concept as a tool to address change and innovation in the organisation, or in the model itself.
Osterwalder and Pigneur (2010)
Blueprint for a strategy to be implemented through organisation structures, processes and systems. A business model describes the rationale of how an organisation creates, delivers, and captures value
Source: Author’s creation
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Business model literature – definition (continued)
Article
Definition
Osterwalder and Pigneur (2002)
Description of the value a company offers to one or several segments of customers and the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital, in order to generate profitable and sustainable revenues streams.
Source: Author’s creation
2.2.2 Components, configuration and typologies The research literature focuses on identifying the constituents (components), configuration of the components and emerging typologies to have a deeper level understanding of business model terminology and its applicability in the competitiveness of the organisations (Table 2 and Table 3). The clarity on the components and their configuration helps to build the core logic of the business of the firm. Table 2
Business model literature – typologies
Research paper
Typologies
Timmers (1998)
E-shops, e-procurement, e-malls, e-auctions, virtual communities, collaboration platforms, third-party marketplaces, value chain integrators, value-chain service providers, information brokerage and trust and other third-party services. The basis includes degree of innovation and functional integration.
Linder and Cantrell (2000)
Price models, convenience models, commodity-plus models, experience models, channel models, intermediary models, trust models, and innovation models. The basis include identifying core profit making activity, and its relative position on the price/value continuum
Weill and Vitale (2001)
Content provider, direct to customer, full-service provider, intermediary, shared infrastructure, value net integrator, virtual community, whole-ofenterprise/government. The basis includes the role in e-business chain.
McGrath (2010)
Advertising, cross-subsidisation, promotion, freemium, barter, gratis. The basis include mode of charging (who pays, who gets free, unit of business).
Wirtz et al. (2010)
Content, commerce, context, connection. On the basis of definition, value proposition, revenue logic.
Source: Author’s creation Table 3
Business model literature – components and configuration
Research paper
Components and configurations
Timmers (1998)
Product/service/information flow architecture, business actors and roles, actor benefits, revenue sources, and marketing strategy.
Markides (1999)
Product innovation, customer relationship, infrastructure management, and financial aspects.
Hamel (2000)
Core strategy, strategic resources, value network, and customer interface.
Linder and Cantrell (2000)
Pricing model, revenue model, channel model, commerce process model, internet-enabled commerce relationship, organisational form, and value proposition.
Source: Author’s creation
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S. Goyal et al. Business model literature – components and configuration (continued)
Research paper
Components and configurations
Amit and Zott (2001) Transaction content, transaction structure, and transaction governance. Weill and Vitale (2001)
Strategic objectives, value proposition, revenue sources, success factors, channels, core competencies, customer segments, and IT infrastructure.
Chesbrough and Rosenbloom (2002)
Value proposition, target market, internal value chain structure, cost structure and profit model, value network, and competitive strategy.
Hedman and Kalling (2003)
Customers, competitors, offering, organisation and activities, resources, supply input, longitudinal dimension.
Morris et al. (2005)
Offering related (how do we create value?), market factors (who do we create value for?), internal capability factors (what is our source of competence?), competitive strategy factors (how do we competitively position ourselves?), economic factors (how we make money?), personal/investor factors (what are our time, scope, and size ambitions?).
Shafer et al. (2005)
Strategic choices, value network, create value, capture value.
Johnson et al. (2008)
Customer value proposition, profit formula, key resources, key processes.
Doganova and Eyquem-Renault (2009)
Value proposition, creation and delivery of value, revenue mechanism
Demil and Lecocq (2010)
Resources and competencies, organisational structure, propositions for value delivery (RCOV).
Giesen et al. (2010)
What value is delivered to customers (customer segments, value proposition, need addressed, offering), how the value is delivered (critical internal resources and processes as well as external partnerships), how revenue is generated (pricing model, forms of monetisation), how the company positions itself (company’s role and relationships across the value chain).
McGrath (2010)
Basic ‘unit of business’, which is what customers pay for, ‘key metrics’ of process or operational advantages for delivering superior performance
Moingeon and Lehmann-Ortega (2010)
Value proposition (customer, product/service), value constellation (value chain and value network), economic profit equation (revenue, cost, capital), social profit equation.
Osterwalder and Pigneur (2010)
Key partnerships, key resources, key activities, value proposition, customer segments, client relationship, channels, cost structure, revenue structure.
Teece (2010)
Value proposition, value creation, value delivery, value capture, identify target market segment, organisational form.
Yunus et al. (2010)
Value proposition, value constellation, economic profit equation, social profit equation.
Wirtz et al. (2010)
Sourcing, value generation, value offering, distribution, revenue.
Source: Author’s creation
The business model literature propagates that the business model design and implementation comprises the configuration of basic operational and economic components including value creation, value delivery and value capture (Magretta, 2002; Chesbrough and Rosenbloom, 2002; Seelos and Mair, 2007; Johnson et al., 2008; Hwang and Christensen, 2008; Baden-Fuller and Morgan, 2010; Demil and Lecocq, 2010; Osterwalder and Pigneur, 2010; Prahalad and Mashelkar, 2010; Teece, 2010; Zott and
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Amit, 2010). The business model framework includes or is linked to the strategic components comprising choice of customer segments, customer relationship and choice of offerings (Hamel, 2000; Voelpel et al., 2004; Shafer et al., 2005; Mitchell and Coles, 2004a, 2004b; Morris et al., 2005; Teece, 2010; Osterwalder and Pigneur, 2010). Doganova and Eyquem-Renault (2009) argue that business model component framework comprises three main building blocks. These include: •
value proposition, which is linked to the design of value offerings of the firm (Magretta, 2002; Afuah and Tucci, 2003)
•
value architecture, which focuses on the partners and channels linked to the value creation and value delivery (Timmers, 1998; Hamel, 2000; Weill and Vitale, 2001; Afuah and Tucci, 2003; Hedman and Kalling, 2003)
•
revenue model, which is linked to the cost and revenue flows (Weill and Vitale, 2001; Magretta, 2002).
The majority of the research literature does not reflect upon the inclusion of organisation structure and leadership as the business model components. The type and form of organisation structure (spin-off, collaboration etc) and leadership type plays an important role in the business model implementation (Voelpel et al., 2004; Demil and Lecocq, 2010; Teece, 2010). The evolution of the business model during the internet boom in 1990s has resulted in the dominance of e-commerce related business model typologies. The e-business typologies are defined on the basis of the different characteristics like degree of innovation, functional integration, role in the e-business value chain, value offerings types (Timmers, 1998; Weill and Vitale, 2001; Wirtz et al., 2010). The generic business model typologies are defined on the basis of the revenue logic and core activity set (McGrath, 2010).
2.2.3 Business model and strategy There has been an ongoing debate on the relationship between business model and strategy (Table 4). Both the concepts are being used interchangeably. Magretta (2002) argues “Today, ‘business model’ and ‘strategy’ are among the most interchangeably used terms in business; they are often stretched to mean everything – and end up meaning nothing”. One of the key strategic management concepts is Porter’s value chain analysis. Business model is considered by many as similar to value chain analysis. Both the concepts draw upon the configuration of activities to create and deliver value leading to revenue generation. There has been lot of ongoing debate on the distinction between business model concept and other strategic management theories. Value chain analysis helps in understanding the overall process flow and operations of the company by categorising each of the generic value-added activities of an organisation as cost (necessary) or advantage (source of strategic value) (Porter, 1985). This is a pre-defined framework, which applies more to the analysis of the manufacturing sector. The key
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difference between business model framework and value chain analysis corresponds to the flexible orientation and composition of the key activities. Value chain analysis has a predefined set of primary and secondary categories, where activities need to be fit in whereas business model framework has a flexible orientation towards identifying the core activities and their inter-relationships. The business model analysis is more adaptive to capture the uniqueness than the value chain analysis of the firms operating in the same industry, having the same target segment and value offerings. Another similar concept corresponds to activity map (Porter, 1996). Table 4
Business model literature – strategy and business model
Research paper
Perspective/arguments
Morris et al. (2005)
Business model refers to the combination of both strategy and operational effectiveness.
Shafer et al. (2005)
Business model comprises the execution aspect of strategy.
Seddon et al. (2004)
Strategy is an external view and focuses on firm’s competitive positioning while a business model is an internal view and supports strategy by outlining firm’s value proposition and the activity system to create and deliver value to customers.
Santos et al. (2009)
A business strategy requires answers to: ‘what is the offer?’, ‘who are the customers?’, and ‘how is the offer produced and delivered to the customers?’ It is the ‘how’ question that subsumes the firm’s choice of business model.
Source: Author’s creation
One school of thought in the research literature perceives strategy as one of the components of the business model (Hamel, 2000; Morris et al., 2005). Business model is defined as the combination of the strategy and operational effectiveness (Morris et al., 2005). The competitive strategy focuses on performing different activities or performing similar activities differently (vis-à-vis competitors); while operational effectiveness focuses on performing similar activities better than the competitors (Porter, 1996). The other school of thought that is more dominant in the research literature, perceives strategy differently from business model concept (Seddon et al., 2004; Santos et al., 2009; Shafer et al., 2005; Zott and Amit, 2008; Magretta, 2002). Osterwalder et al. (2005) define business model as a link between strategy, business organisation, and information and communication technology (ICT). The strategic layer acts at a planning level and comprises positioning, vision, goals and objectives. The process layer acts at an implementation level and comprises business organisation and ICT workflows. The business model layers acts as glue binding the strategic layer and process layer. It acts at the architectural level and comprises the revenue logic (Figure 2). Seddon et al. (2004) argue that strategy is an external view and focuses on the competitive positioning of the firm while business model is an internal view and supports strategy by outlining the firm’s value proposition and the activity system to create and deliver value to the customers.
Understanding business model Figure 2
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Business model and strategy
Source: Adapted from Osterwalder et al. (2005)
Santos et al. (2009) emphasise the role of strategy and business model in understanding the answers to the ‘what’, ‘who’ and ‘why’ questions. The former focuses on the answers to the following questions – What is the offer? Who are the customers? The latter focuses on the answer to the third question – How is the value created and delivered to the customer? The organisations having the same product or service offer (what), aiming for the same market segment (who), do so differently with different business models (how). Shafer et al. (2005) distinguish between strategy and business model in the context of planning versus execution. Strategy refers to the pattern of choices made over time in the backward looking context or plan of action in the forward looking domain while business model comprises the execution aspect of strategy. It facilitates the analysis, testing, and validation of the cause-and-effect relationships that flow from the strategic choices that have been made. Zott and Amit (2008) argue that product market strategy focuses on positioning of the firm vis-à-vis its rivals and business model is a structural construct that highlights the economic exchanges of the firm with the external parties. Magretta (2002) clarifies the comparison between strategy and business model in terms of focus. Strategy focuses on competition; while business model focuses on cooperation, partnerships and value network.
2.2.4 Business model innovation The dynamic external environment and increasing penetration of advanced technologies are reshaping the competitive and economic landscape for the business organisations. These dynamic factors (constraining and enabling) are leading to the research focus on analysing the concept of business model innovation. There is a realisation that business model is not a static aspect and requires continuous innovation and reinvention, subject to the constraining and enabling change factors in the external environment (Voelpel et al.,
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2004). The success of business model innovation is driven by the capability of the organisations to adapt their business models to the environmental changes in terms of customer, technology, competition and macro-economic trends (Voelpel et al., 2004). The key research themes within business model innovation include drivers and barriers for business model innovation; risk and impact of imitation; impact on incumbent firms and new firms; incremental versus disruptive innovation, single or hybrid business models, and role of strategy and process workflows. Business model innovation involves redefining the rules of the game of the industry by finding new gaps regarding customer need, customer segments, value creation and value delivery, and fulfilling the same, thereby creating a new market (Markides, 1997). Chesbrough and Rosenbloom (2002) define business model innovation as a mediator between technical and economic domains for successful commercialisation of new technology. Without business model innovation, it is not feasible to commercialise the technology innovation. Mitchell and Coles (2003b, 2004a) analyse the stock market performance of public companies in the USA to correlate the firm performance with business model innovation. The authors argue that business model improvement requires relative superior performance on four or more elements of the business model including ‘who’, ‘what’, ‘when’, ‘why’, ‘where’, ‘how’ and ‘how much’. Business model innovation is defined as an ongoing and iterative process. The success depends upon top management interest, internal processes and business model flexibility and adaptability. Markides (2006) argues that business model innovation involves focus on enlarging the existing economic pie, either by attracting new customers into the market or by encouraging existing customers to consume more. The design and implementation of business model requires a system design perspective. It is a system comprising the configuration of different components leading to value creation, value delivery and value capture. Business model innovation requires focuses on system level design as compared to partial optimisation of individual activities and captures a range of interdependencies within business model elements (Morris, 2009; Amit and Zott, 2010). The few other elements of the business model innovation involve focus on non-imitability and sustainability. The idea behind business model innovation is that it should lead to sustainability and non-imitability. Business model innovation should be fulfilling specific customer need and lead to conflict with respect to adoption by competitors; either by virtue of disturbing existing relationships or having strong intellectual protection or organisation dynamics (Teece, 2010).
2.2.5 Business models in emerging markets There is an increasing realisation among the global enterprises towards the huge socio-economic potential in serving the unmet needs of the low-income population living across the developing economies. There are three key points differentiating the developed economies from the developing economies. The first dimension is the socio-economic profile of the population in developing economies. The majority of the population living in developing economies is a low income socio-economic group living predominantly in rural areas. The second dimension is the market opportunity in the developing economies. The developing economies especially the Brazil, Russia, India, China and South Africa (BRICS) nations are having a GDP growth rate of 5%–10% since 2006; and account for
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the majority of the underserved population, also characterised as the base of the pyramid. The third dimension is regarding the challenges in the developing economies. These economies are characterised by informal market economy having a significant proportion of the population living in rural areas. These differences call for a different approach towards the developing economies. This has led to the evolution of a separate stream of research literature aimed at understanding the business model context, opportunities and challenges in these emerging economies. Considering the fact that the key market in the developing economies corresponds to the base of the pyramid segment, the research literature emphasises the need for social business models, which are driven by the social and environmental impact along with the economic returns as the criterion for the success or failure of the business. This requires a different mindset in terms of value offering, creation, delivery and revenue generation (Prahalad and Hammond, 2002; Prahalad and Lieberthal, 2003). London and Hart (2004) argue that business models in emerging markets need to focus on building relationships with non-traditional partners, creating high quality-low cost custom solutions with profits derived from volumes rather than margins, building local capacity and creating social embeddedness – ability to create competitive advantage based on a deep understanding of and integration with the local environment. There is a need for clarity on ‘how’ part of the business model for successful implementation and socio-economics benefits at the base of the pyramid (Mair and Marti, 2006; Seelos and Mair, 2007). The key questions include the following. What kind of business models can be implemented to play a dual role of fulfilling the social objective (meeting the unmet social needs of the poor people) and economic objective (justifiable returns and profits for companies involved)? What kind of resources, capabilities and networking is needed to build the ecosystem to achieve the social and economic objectives? Dahan et al. (2010) highlight the need for collaboration with non-traditional partners like non-government organisations (NGOs) in addressing the dynamic environmental challenges while designing the social business models for targeting the base of the pyramid segment in emerging markets. Sanchez and Ricart (2010) explain the different types of business model configurations for lowincome markets – isolated and interactive. Isolated business models involve focus on firm’s own resources and capabilities leading to incremental improvements by bringing in new technologies or increasing efficiency. Interactive business models combine firm’s own resources and capabilities with external ecosystem capabilities leading to disruptive innovation and systemic change in value creation and delivery. The organisations need to transition themselves from a capitalist mindset to socio-economic mindset by focusing on the shared value creation, which involves creating economic value along with creating value for the society by addressing its needs and challenges (Esposito et al., 2012). This requires reconfiguration of the products and markets, redefining productivity in the value chain and enabling local cluster development (Porter and Kramer, 2011). Yunus et al. (2010) argue the need for wide-spread adoption of social business models to address the underserved needs of the base of the pyramid segment. This requires focus on doing creative thinking, collaborating with complementary partners, conducting ongoing experimentation as low-cost probes, aligning with the social mission oriented shareholders, and specifying social profit objectives clearly.
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2.2.6 Others – metrics, leadership, organisation form and structure There is a limited focus on the performance metrics, role of leadership and organisation structure in the business model literature. However, there are few research articles, which focus on these areas as essential requirements to ensure match between business model design and implementation. The focus on metrics helps to benchmark the vitality and performance of the business model. The research literature emphasises the operational and financial indicators as criteria for performance evaluation. Hamel (2000) outlines four indicators linked to efficiency in value delivery, uniqueness of the business concept, degree of fit among business model components, and exploiting the profit boosters like competitor lock-out and strategic flexibility. Afuah and Tucci (2003) propose three level metric comprising measurements of the profitability level, profitability predictors and business model components. The first and second level measure financial attributes like earnings, cash-flow, revenue, margins and growth rate. The third level involves benchmarking the performance of each of the business model components to evaluate and improve the weak links. The form of organisation structure should be appropriate to the business model. The different business models require different organisation structure ranging from integrated setup, standalone business unit to collaborative setup (joint venture, merger) (Linder and Cantrell, 2000). This organisation structure undergoes a change depending upon the processes and stakeholders required during the value creation and value network activities (Demil and Lecocq, 2010).
2.2.7 Theoretical perspective The strategic management literature offers multi-theoretical lenses to analyse the value creation and value appropriation dimensions of business model (Table 5). This involves value chain framework (Porter, 1985), industry structure framework using five forces (Porter, 1980), RBV (RBV of the firm) framework (Penrose, 1959; Wernerfelt, 1984; Grant, 1991; Peteraf, 1993; Barney, 2001), Schumpeter’s theory of creative destruction (Schumpeter, 1934), strategic network theory (Gulati et al., 2000), structuration theory (Giddens, 1979, 1984), institutional entrepreneurship theory (Dimaggio, 1988), social capital theory (Burt, 1992; Granovetter, 1992; Nahapiet and Ghoshal, 1998) and transaction cost economics (TCE) framework (Coase, 1937; Williamson, 1981). Each school of thought has its own contribution to the firm’s logic of value creation and value appropriation. This signifies the importance of multi-theoretic lenses in analysis of value creation and value appropriation. The research literature raises the fundamental question on the theoretical aspect of business model. Despite the huge interest, focus and attention towards the business model terminology since 1990s, it lacks theoretical understanding. It is rather considered as an integrative framework, which includes contribution from different strategic management theories across value creation and value delivery (Amit and Zott, 2001; Morris et al., 2005).
Gulati et al. (2000)
Strategic networks
Source: Author’s creation
Schumpeter (1934)
Schumpeter innovation
The objective of business model innovation is to gain and maintain sustainable competitive advantage by bringing unique combinations of technology, resources and capabilities that result in superior value creation and delivery. This is in consistent with Schumpeter’s theory of creative destructive (Schumpeter, 1934), which states that technology and innovation helps to generate superior returns for the firm resulting in overall economic development. For example, the internet revolution has changed the dynamics of business for music, movie and publishing worlds drastically leading to emergence of radically new business models, which have transformed the industry structure all together.
The main questions that the value chain framework seeks to address are what activities should a firm perform and how and what is the configuration of the firm’s activities that would enable it to add value to the product and to compete in its industry? The advancement of internet and communication technologies has transformed the value chain framework of the firms resulting in emergence of dynamic business models having online or virtual value chains at the supplier side and the delivery side. So, value creation resulting from value chain framework is one of the core components of business model. The value chain can be transformed to create value either by differentiation or by bringing in efficiency perspective.
Strategic alliances, joint-ventures, Network theory plays an important role in value creation by increasing transaction efficiency, decreasing time to market, reducing asymmetry of information and optimum price/quality value co-creation, shared combination leveraging complementary capabilities. capabilities, transparent relationship, contracts and trust
Creative destruction resulting from technology and innovation
Primary activities and support activities
Structure, conduct, performance The industry structure does impact the business model of firms as depending upon the same; the (SCP) paradigm; Porter’s 5 forces business model may focus on efficiency or differentiation perspectives. Apart from that, the purpose of business model innovation is to transform the industry structure, which requires an understanding of industry dynamics and wherein the difference can be made by creating new markets (substitutes or complementary) or by transforming existing markets.
Bain (1968) and Porter (1980)
Market-based view/industrial organisation view (IO)
Porter (1985)
VRIN framework – valuable, rare, RBV plays an important role in identifying the core resources and capabilities and their role in inimitable and non-substitutable value creation and value delivery. This helps further to determine the firm’s boundary by identifying those activities, which do not fulfil the VRIN framework. This can be outsourced to benefit from the capabilities of the service provider, while preserving the core activities in-house.
Penrose (1959), Wernerfelt (1984), Barney (2001), Grant (1991) and Peteraf (1993)
RBV
Table 5
Value chain analysis
Relevance to business model The relative amount of overall transaction cost act as a decision criteria to have channel partners or not, which is one of the important considerations of value creation and value delivery aspects of business model. The primary objective of a firm is to economise on the transaction costs through the selection of appropriate governance structures for handling its transactions.
Attributes Asset specificity, transaction frequency and uncertainty (behavioural and environmental)
Key authors
Coase (1937) and Williamson (1981, 1985, 1991)
TCE
Theoretical base
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Amit and Zott (2001) argue that business model is an integrative framework, which gets theoretical contribution from different strategic management theories including value chain analysis, Schumpeter’s innovation, RBV, strategic network theory and TCE. Wright et al. (2005) argue that there exists no single theoretical perspective, which can explain the strategic decisions required for business models at base of the pyramid. Morris et al. (2005) argue that business model is grounded in more than one theory related to value concept, value system, strategic positioning, RBV, value network, and cooperative arrangements. Mair and Marti (2006) argue that social entrepreneurship requires embeddedness as a critical link between different theoretical perspectives as structuration theory (Giddens, 1979, 1984), institutional entrepreneurship theory (Dimaggio, 1988) and social capital theory (Burt, 1992; Granovetter, 1992; Nahapeit and Ghoshal, 1998). The key determinants of any business model involve identification of unmet customer need (value proposition), mechanism in place to create and deliver that value efficiently (value creation and value delivery) by using strategic networks and key resources and competencies and value capture for all engaged stakeholders. The business model is primarily driven by efficiency and value. The efficiency aspect deals with value creation while value aspect lies in value proposition and customer management (Osterwalder and Pigneur, 2010). From value creation and efficiency perspective, the business model concept relates to theoretical concepts of value chain concept, RBV and TCE, strategic network theory, structural theory, institutional entrepreneurship theory and social capital theory. From value proposition and strategic positioning perspective (Porter, 1996), business model concept draws from theoretical concepts of Schumpeter innovation, market-based view and social capital view, which transforms the industry dynamics and structure thereby leading to competitive advantage.
3
Research implications – theoretical and practitioner
From the theoretical perspective, this study is an original attempt to provide an integrated picture of the key research themes around business model concept. Also, this study provides the theoretical linkage and multi-theoretical contribution in defining the business model theme. From practitioner perspective, this study provides an understanding of the business model concept in terms of definition, components and configuration, typologies, relationship with strategy, innovation and relevance in emerging markets.
4
Conclusions
This research article reviews and presents the comprehensive picture on the anatomy of business model domain. The article focuses on the following key questions. How business model domain has evolved over the years – historical, current and future trends? What are the broad characteristics and research areas in business model? What is the theoretical perspective regarding business model? The research literature on business models is getting rich across horizontal and vertical dimensions. This is a positive sign as well as a challenge, considering the diversity and non-uniformity of research findings and thoughts on business models. There lies the common understanding that business model
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theme still lacks the conceptual baseline and thereby lacks theoretical conceptualisation. Weill et al. (2005) argue “Few concepts in business today are as widely discussed – and as seldom systematically studied – as the concept of business models. Despite its common use by academics and managers, the concept of business model remains seldom studied”. This calls for the need and urgency of transforming business model concept into a uniform theoretical discipline. The literature review also brings out new research trends around business models typologies, components and configuration in emerging markets. This shows that business model design, implementation and innovation is gaining increasing importance as a key driver for market entry, market creation and market development in the emerging economies. The ‘how’ and ‘what’ questions around design and implementation of business models will continue to play a major role in gaining the competitive advantage for the organisations, especially in the context of emerging economies.
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