CHAPTER 2 - LITERATURE REVIEW
2.1 The business model
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CHAPTER 2 - LITERATURE REVIEW
Because of the above-stated problems and needs, a business model for services must be established. First, we will establish what a business model is and how to use it; then we will introduce questions of service design and determine how to develop a business model in the service context. Therefore, our literature review is composed of two parts; the first section will address the standard business model, and the second section will explore the possibility of developing new designs for a service-oriented business model.
2.1 The business model
There is no general definition of the term “business model.” Stewart and Zhao (2000) describe the business model as “a statement of how a firm makes money and sustains its profit stream over time.” Slywotsky (1996) refers to “the totality of how a company selects its customers, differentiates its offerings, defines the tasks which ones it performs itself or outsources, configures its resources, goes to market, creates utility for customers and captures profits.” Morris et al. (2007) propose that “a busi-ness model is a concise representation of how an interrelated set of decision variables in the areas of venture strategy, architecture, and economics are addressed to create a sustainable competitive advantage in defined markets.” To summarize, a business model can be described as a method by which a firm can determine a successful strategy.
In addition to the definition of a business model, many authors have gone further to define of the components that are contained in a business model. Components, also referred to as the elements, building blocks, functions or attributes of a business mod-el, are the individual aspects of a business model that help managers to better under-stand and describe the make-up and operation of a firm (Osterwalder, 2004). Next, we will review some representative business models, study their frameworks, compo-nents and features, and extract the supporting concepts of these models.
Timmer (1998) indicates that a business model needs to illustrate the organiza-tional architecture of issues regarding product, service, and information flows, with a description of the various business actors and their roles, the potential benefits for these actors as well as the revenue sources, and finally the necessity of providing a marketing strategy to accomplish a business mission.
Chesbrough and Rosenbloom (2002) propose that a business model is composed of six main functions. These functions are the value proposition, target markets,
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Customer Benefits Configuration Company BoundariesEfficient / Unique / Fit / Profit Boosters
ternal value chain structure, cost structure and profit model, value network, and com-petitive strategy. See Table 1.
Table 1 Chesbrough and Rosenbloom (2002) business model components Function Description
Value proposition
The first step is to define a potential value proposition, which is “what form of products or services should be offered,” or from the customers’
viewpoint, “what problems need solving?”
Target markets
The definition of the value proposition is based on the idea of a target market. Different markets have diverse properties. A firm needs to identi-fy its target market and develop its value proposition in consideration of its customers’ needs.
Internal value chain structure
A firm must construct a value chain within the firm. This value chain has two aims: to create value for its customers and to obtain value. The value depends on a balance between customers, suppliers, and competitors.
Cost structure and profit model
A firm should determine which mechanisms to use, such as its customers’
method of payment, customer costs, and how to create value that is shared between customers, businesses, and suppliers.
Value network This function describes a firm’s position within the value network, in-cluding the identification of complementors and competitors.
Competitive strategy
The final function of a business model is to help a firm determine what type of competitive strategy it should use.
Hamel (2000) presents a business model that consists of four main elements, which are connected by three “bridges” and divided into different sub-elements. The business model illustrates a view of the overall structure of a firm. See Figure 1 and Table 2.
Figure 1 Hamel’s (2000) business model concept Table 2 Hamel’s (2000) business model components Element Sub-element Description
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Business mission Captures a firm’s overall goals.
Product/market
scope Defines a firm’s product/market scope.
Basis for differentiation
Outlines the qualities of a firm that make it different or better than its competitors.
Strategic resources
Core
competencies
Describes a firm’s knowledge base, skills and unique capabilities.
Strategic assets Refers to a firm’s key assets, such as infrastructure, brands and patents.
Core processes Outlines what a firm actually does to accomplish its business.
Customer interface
Fulfillment &
support
Refers to the way in which a firm reaches its cus-tomers (e.g., channels).
Information &
insight
Defines the knowledge that is collected from and used to analyze customer behavior.
Relationship dynamics
Refers to the interaction between a firm and its cus-tomers.
Pricing Structure Explains what a firm charges its customers for and how it bills them.
Value network
Suppliers Represents a firm’s partners that typically supply the critical components for a final product or solution.
Partners Refers to a firm’s partners that its business, reduce risk, or acquire resources.
Coalitions Represents the alliances between non-competitors to reach a strategic purposes.
Bridge Description
Configuration
The link between a firm’s core strategy and its strate-gic resources, referring to the unique way in which strategic resources are combined to support the core strategy.
Customer benefits
The connection between a firm’s core strategy and its customer interface, defining the benefits that are of-fered to the customers.
Company boundaries
The bridge between a firm’s strategic resources and its value network, referring to the decisions that are made about a firm’s activities and outsourced activi-ties.
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target, how to price the product or service, who pays for it, what strategies to adopt, how to provide the target level of value, and how to sustain a firm’s competitive ad-vantage. See Table 3.Table 3 Afuah and Tucci (2001) business model components Component Questions
Customer value
What can a firm offer customers that is distinctive or better than compet-itors?
Scope Which customers benefit from a firm’s product or service and what range of products or services bring value?
Pricing How does a firm determine the price of a product or service that it offers?
Revenue source
Where does a firm’s revenue comes from, what is the amount that cus-tomers will pay for a product or service and under what conditions, and what are the margins in a given market, and what drives that market?
Connected activities
What activities does a firm perform to generate value and when, and how are those activities are connected?
Capabilities
What are a firm’s capabilities, which capability gaps does a firm need to fill, and how are these capabilities distinctive or better than those of other firms or difficult to imitate?
Implementation How do a firm’s organizational structure, systems, people, and environ-ment best suit the connected components?
Sustainability
How does a firm continue to stay economically viable, how does a firm make it difficult for other firms to imitate it, and how does a firm sustain its competitive advantage?
Applegate (2001) presents a business model framework that consists of three basic components regarding concept, value and capabilities. Additionally, the com-ponents contain some second-order conceptions. See Table 4.
Table 4 Applegate (2001) business model components Component Description
Concept
Concept refers to products and services offered, market opportunities, a strategy to capture dominant market share, an evolutionary business strategy, and competitive dynamics.
Capabilities
Capabilities are performed within an organization’s structure and culture, infrastructure model, operating model, marketing and sales model, man-agement model, and development model that is built by personnel and
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Value is generated from a business model, including financial perfor-mance, benefits returned to stakeholders and to the firm, brand and repu-tation, and market share.
Mitchell and Coles (2003) suggest that a business model consists of seven main components that give an enterprise the ability to provide products or services to cus-tomers and end-users. See Table 5.
Table 5 Mitchell and Coles (2003) business model components Component Description
Who All stakeholders that a firm meets and affects (e.g., customers, partners, and business actors)
What Product or service offerings, and the advantages and disadvantages of those offerings for stakeholders
When The proper time to affect stakeholders
Where The places that firm delivers value to and affects
Why The reasons for stakeholder participation in a firm’s business How The way in which a firm provides value
How much The prices and all of the costs that customers spend for products or services Osterwalder et al. (2005) developed a business model framework that is com-posed of nine building blocks; based on their properties, these components can be classified into four pillars. See Figure 2 and Table 6. As opposed to other models, Os-terwalder et al.’s business model emphasizes that links among the components and the properties of the components.
Figure 2 Osterwalder et al. (2005) business model canvas Table 6 Osterwalder et al. (2005) business model components
Finance
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Offering The value propositions, described as a bundle of products or services that a firm offers to its customers Customer
Identifies who purchases products or services from a firm, how the products/services are delivered, and how relationships can be built with them
Infrastructure
How a firm employs its resources to perform activi-ties, and with whom a firm cooperates to bring value to its business model
Finance
The costs that result from the other components and revenues that are generated through customers to sustain a firm’s business model.
Pillar Component Description
Offer Value
proposition
An overall view of a bundle of products or services that a firm offers to solve its customer problems and to satisfy customer needs.
Customer
Customer segments
Defines one or more of several customer segments to whom the firm wants to offer value propositions.
Channels A means of communicating with and reaching cus-tomers to deliver value propositions.
Customer relationships
Describes the type of links that a firm establishes and maintains with customer segments.
Infrastructure
Key activities Describes the arrangement of activities that a firm must perform to make its business model work.
Key resources
Refers to the assets that are required to offer and de-liver other components by executing certain activities to create value for customers.
Partner network
A cooperative relationship between two or more firms that outsource certain activities or acquire cer-tain resources.
Finance
Cost structure The representation in currency of all of the methods that are employed in a business model.
Revenue streams
Refers to a variety of revenue flows that are generat-ed from customer segments to whom a firm offers value.
Michael et al. (2005) introduce a six-component framework for characterizing a business model. These components are applied at three different levels. The business
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model introduces three levels that reflect the different managerial purposes of a model;
different decisions are made at each level. See Table 7.
Table 7 Michael et al.(2005) business model components Component Description
Offering How do we create value?
Market Who do we create value for?
Internal capability What is our source of competence?
Competitive strategy How do we competitively position ourselves?
Economic How do we make money?
Personal/investor What are our time, scope, and size ambitions?
Level Description
Foundation level Defining generic decisions to identify the universal business models Proprietary level Creating unique combinations to gain marketplace advantage Rules level Establishing guiding principles to execute the business models
After reviewing the extant literature, we conclude that these business model components, according to their similar natures, can be divided into eleven categories, including an organization, customers, service proposition, relationships, channels, re-sources, activities, partners, finance, customer value, and benefits (see Table 8). From the classifications, we can determine what general components form a business model.
In addition, we adopt the concept of pillars, which are the basis of a business model and contain the essential issues that a firm needs to address (Osterwalder et al., 2005) as well as three increasingly specific levels of decision making, which can help a firm to make a series of decisions to fulfill its business model (Michael et al., 2005). A general and integrative business model framework is presented.
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Table 8 The classification of business model components
Source Components
category organization customers service
proposition relationships channels resources activities partners finance customer value benefits Timmers
internal value chain structure
market scope product scope relationship dynamics
Tucci (2001) sustainability market scope product/
service scope capabilities
implementation;
connected ac-tivities
price;
revenue customer value
Applegate
sales model people
infrastructure,
relationships channels key resources