The Confusing “Business Model” Construct

28 January 2011 at 3:04 pm 4 comments

| Nicolai Foss |

The discourse of both practicing managers and management scholars abounds with concepts and jargon that sound fine, and surely refer to something real and important, but are used in a hopelessly imprecise manner and have all sorts of different, often conflicting, meaning attached to them. Examples of yesteryear include “value creation,” “competitive advantage,” and “value proposition” — “yesteryear”, because reasonable clarity has gradually been achieved with respect to their meaning.

Another example, where lack of clarity unfortunately persists, is that of “business models” — which refers to, for example, “bricks and clicks business models” (which is mainly about integrating online and offline presence), “collective business models” (which is mainly about pooling resources across firms), “cutting out the middleman” (which is, well, you guessed it), “franchising” (which is a particular contractual arrangement for handling distribution), “freemium” (offering free basic services and expensive premium services” etc., etc. (examples are from the wiki on the subject). So, business models are about internet distribution, the contractual form of distribution, resource sharing, cutting out middlemen, differentiation policies, etc. It is not clear what unites all this, except, perhaps, a basic concern with the consumer/customer side of value creation and appropriation (and even that doesn’t hold for all conceptions). Moreover, some argue that building a business model is subordinate to formulating a strategy, while others (e.g., Teece) argue that strategies are on a lower level than business models.

Obviously, attempts to reduce all this confusion are highly laudauble. Two recent such attempts deserve mention here. One is an excellent paper, “The Business Model: Theoretical Roots, Recent Developments, and Future Research,” by Christoph Zott, Raphael Amit, and Lorenzo Massa. Among other things they argue that the business model is a meaningful unit of analysis, and should be understood as a firm-centric, yet boundary-spanning activity system supported by a logic of value creation and appropriation. The second attempt is a special issue of Long Range Planning on the subject, with contributions from such luminaries as David Teece, Raphael Amit, Rita McGrath, Muhammad Yunus, Yves Doz, Michael Tushman and many others. I have only read the Teece paper, but look forward to reading the rest. Teece (in “Business Models, Business Strategy, and Innovation”) begins by arguing the “concept of a business model lacks theoretical grounding in economics or in business studies,” goes on to offer his own definition, supplies several examples, discusses the conceptual differences between business models and business strategies and ends by linking the business model constructs to his earlier work on how the organization of the innovation process influences the appropriation of value from innovation. Like so many articles in LRP, this paper will be excellent for the classroom.

Entry filed under: - Foss -, Management Theory, Papers. Tags: .

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4 Comments Add your own

  • 1. Michael E. Marotta  |  28 January 2011 at 7:31 pm

    A model is tool.

    The world still has places for steam engines and DC motors, rat-tail files and mill bastards. I was surprised, but I should have known, when my father-in-law pointed out that there are two kinds of hand saws, one for ripping with the grain, and the other for cross cuts.

    You can add value by bringing in the middle man. You can create a competitive advantage by franchising (out) your business or by franchising (in) your enterprise.

    Traditionally, Sears stood behind every Craftsman tool, except the flat screwdriver because so many people used them for chisels. If your business model is not working, maybe you need a different tool.

    The rich assortment of ways to think about people engaging each other can only be helpful.

  • 2. srp  |  28 January 2011 at 9:39 pm

    I think management people flee to whatever word has the strongest connotation and loosest denotation. Competitive advantage is still all over the map, but as it gets more pinned down people stop using it so much.

    Or people just misuse a word with an initially precise definition until the cumulative number of variant usages renders it effectively meaningless. You can’t say “disruptive innovation” anymore and have any hope that people will know you intend Christiansen’s initial meaning rather than it’s opposite. Likewise “business model”, which started out as a narrow concept about the basis on which a firm was paid for its outputs and on which it paid for it’s inputs.

    It’s tough out there if you like to use language precisely without having to explicitly define your terms each time and/or to coin new words to recover old meanings.

  • 3. Avinash Mulye  |  29 January 2011 at 10:40 pm

    This is great. Prof. Porter in a postscript to his article “Strategy & Internet” said “The definition of a business model is murky at best.”

    Prof. Porter goes on to add –

    “Most often, it seems to refer to a loose conception of how a company does business and generates revenue”. “Yet simply having a business model is an exceedingly low bar to set for building a company”. “Generating revenue is a far cry from creating economic value, and no business model can be evaluated independently of industry structure. The business model approach to management becomes an invitation for faulty thinking and self-delusion.”

    In view of these statements by Prof. Porter, I think this post on Business Models is well worth reading and bookmarking.

  • 4. Avinash Mulye  |  6 February 2011 at 4:27 pm

    Jan-Feb 2011 issue of HBR has multiple articles on Business Models.

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