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Business model
A business model describes the rationale of how an organization creates, delivers, and captures value[1] - economic,
social, or other forms of value. The process of business model design is part of business strategy.
In theory and practice the term business model is used for a broad range of informal and formal descriptions to
represent core aspects of a business, including purpose, offerings, strategies, infrastructure, organizational structures,
trading practices, and operational processes and policies.
Whenever a business is established, it either explicitly or implicitly employs a particular business model that
describes the design or architecture of the value creation, delivery, and capture mechanisms employed by the
business enterprise. The essence of a business model is that it defines the manner by which the business enterprise
delivers value to customers, entices customers to pay for value, and converts those payments to profit: it thus reflects
management’s hypothesis about what customers want, how they want it, and how an enterprise can organize to best
meet those needs, get paid for doing so, and make a profit[2] . Business models are used to describe and classify
businesses (especially in an entrepreneurial setting), but they are also used by managers inside companies to explore
possibilities for future development, and finally well known business models operate as recipes for creative
managers [3] .
History
Over the years, business models have become much more sophisticated. The bait and hook business model (also
referred to as the "razor and blades business model" or the "tied products business model") was introduced in the
early 20th century. This involves offering a basic product at a very low cost, often at a loss (the "bait"), then charging
compensatory recurring amounts for refills or associated products or services (the "hook"). Examples include: razor
(bait) and blades (hook); cell phones (bait) and air time (hook); computer printers (bait) and ink cartridge refills
(hook); and cameras (bait) and prints (hook). An interesting variant of this model is a software developer that gives
away its word processor reader free of charge but charges several hundred dollars for its word processor writer.
In the 1950s, new business models came from McDonald's Restaurants and Toyota. In the 1960s, the innovators
were Wal-Mart and Hypermarkets. The 1970s saw new business models from FedEx and Toys R Us; the 1980s from
Blockbuster, Home Depot, Intel, and Dell Computer; the 1990s from Southwest Airlines, Netflix, eBay,
Amazon.com, and Starbucks. Poorly thought out business models were a problem with many dot-coms.
Today, the type of business models might depend on how technology is used. For example, entrepreneurs on the
internet have also created entirely new models that depend entirely on existing or emergent technology. Using
technology, businesses can reach a large number of customers with minimal costs.
Applications
Malone et al.[6] at MIT find that some business models, as defined by them, indeed performed better than others in a
dataset consisting of the largest U.S. firms, in the period 1998 through 2002, while they did not prove whether the
existence of a business model mattered.
Related concepts
The process of business model design is part of business strategy. The implementation of a company's business
model into organisational structures (e.g. organigrams, workflows, human resources) and systems (e.g. information
technology architecture, production lines) is part of a company's business operations.
It is important to understand that business modeling commonly refers to business process design at the operational
level, whereas business models and business model design refer to defining the business logic of a company at the
strategic level.
The brand is a consequence of and has a symbiotic relationship with the business model since the business model
determines the brand promise and the brand equity becomes a feature of the model. Managing this is a task of
integrated marketing.
See also
• Business model design
• Business plan
• Business process modeling
• Business reference model
• Business rule
• Competitive advantage
• Core competency
• Growth Platforms
• Market forms
• Marketing
Business model 4
• Marketing plan
• Strategic management
• Strategic planning
• Strategy dynamics
• Value migration
Further reading
• 'The Business Model: Theoretical Roots, Recent Developments, and Future Research', C. Zott, R. Amit, &
L.Massa., WP-862, IESE, June, 2010 - revised September 2010 [http://www.iese.edu/research/pdfs/
DI-0862-E.pdf]
• "Special Issue on Business Models" Long Range Planning, vol 43 april 2010, that includes 19 pieces by leading
scholars on the nature of business models
• The Role of the Business Model in capturing value from Innovation: Evidence from XEROX Corporation’s
Technology Spinoff Companies., H. Chesbrough and R. S. Rosenbloom , Boston, Massachusetts, Harvard
Business School, 2002.
• Leading the revolution., G. Hamel, Boston, Harvard Business School Press, 2000.
• Changing Business Models: Surveying the Landscape, J. Linder and S. Cantrell, Accenture Institute for Strategic
Change, 2000.
• Developing Business Models for eBusiness., O. Peterovic and C. Kittl et al., International Conference on
Electronic Commerce 2001, 2001.
• Place to space: Migrating to eBusiness Models., P. Weill and M. R. Vitale, Boston,Harvard Business School
Press, 2001.
• Value-based Requirements Engineering - Exploring Innovative e-Commerce Ideas, J. Gordijn, Amsterdam, Vrije
Universiteit, 2002.
• Internet Business Models and Strategies, A. Afuah and C. Tucci, Boston, McGraw Hill, 2003.
• Focus Theme Articles: Business Models for Content Delivery: An Empirical Analysis of the Newspaper and
Magazine Industry [7], Marc Fetscherin and Gerhard Knolmayer, International Journal on Media Management,
Volume 6, Issue 1 & 2 September 2004 , pages 4 – 11, September 2004.
• Business Model Generation, A. Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries,
self published, 2009
References
[1] Business Model Generation (http:/ / www. businessmodelgeneration. com), A. Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners
from 45 countries, self published, 2010
[2] (David Teece 2010)
[3] (Charles Baden-Fuller and Mary Morgan, 2010)
[4] http:/ / www. goarticles. com/ cgi-bin/ showa. cgi?C=2964497
[5] The Business Model Ontology - A Proposition In A Design Science Approach (http:/ / www. hec. unil. ch/ aosterwa/ PhD/
Osterwalder_PhD_BM_Ontology. pdf)
[6] Do Some Business Models Perform Better than Others? (http:/ / papers. ssrn. com/ sol3/ papers. cfm?abstract_id=920667), Malone et al., May
2006
[7] http:/ / www. informaworld. com/ smpp/ content~content=a785034169
Article Sources and Contributors 5
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