The Confusing “Business Model” Construct
| 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.