Business model

By : Aidin Salamzadeh
Teacher : Professor Zarei
Fall 2009

Faculty of Entrepreneurship , University of Tehran

Author(s) Definition(s)
Hawkins A description of the commercial relationship between a business enterprise
(2001) and the products and/or services it provides in the market.
Amit & Zott "A business model depicts the content, structure, and governance of
(2001) transactions designed so as to create value through the exploitation
of business opportunities"
Gill(2000) A business model embodies the logic underlying the operation of business
organizations . It should enable one to understand and predict ”how a
business company is organized, what it sells, how it delivers products and
services, how it adds value”
Pigneur An architecture of a firm and its network of partners for creating, marketing
(2000) and delivering value and relationship capital to one or several segments of
customers in order to generate profitable and sustainable revenue streams.
Timmers as architecture for the product, service and information flows,
(1998) including a description of the various business actors and their roles;
a description of the potential benefits for the various business actors;
and a description of the sources of revenues
Venkatraman a coordinated plan to design strategy along three vectors: customer
& Henderson interaction, asset configuration, and knowledge leverage.
(1998)


Author(s) Definition(s)
Alexander A business model is nothing else than a representation of how an
Osterwalder organization makes (or intends to make) money. This can be nicely
(2009) described through the 9 building blocks illustrated in our graphical
illustration that we mention it as "business model canvas“.

Afuah (2004) the set of activities which a firm performs, how it performs them, and
when it performs them so as to offer its customers benefits they want
and to earn a profit
Shafer & Smith reviewing relevant literature and classifying different definitions
(2004) categorized the business model components that were cited twice or
more. The resulting affinity diagram identified four major categories:
strategic choices, creating value, capturing value, and the value
network.
Thompson & "A company's business model deals with the revenue-cost-profit
Strick (2003) economies of its strategy"
Krishnamurthy “A business model is a path to a company’s profitability”.
(2003)
Saloner (2001) a strategy that has a reasonable probability of succeeding if well
executed.


Business Logic Today
• Problem: Interpretation of •Positioning
strategy •Objectives & goals
• Result: Re-inventing strategy •Communication of strategy

Information &
Planning level Communication
Strategy Technology (ICT)
pressure
?

Implementation e-Business
level Business processes
Processes

e-Business Technology layer


Business Logic Tomorrow
Conceptual architecture
of a business strategy
Information &
Communication
Planning level Technology (ICT)
Strategy pressure

Architectural e-Business
level Business opportunities &
Model change
Implementation e-Business
level Business processes
Processes
e-Business Technology layer


What is a Business Model anyway?
 A business model is not a description
of a complex social system itself with all
its actors, relations and processes.
Instead it describes the logic of a
“business system” for creating value,
that lies behind the actual processes.
Strategy
 A business model is the conceptual and

Business Impact
architectural implementation of a
business strategy and represents the Business
foundation for Model
the implementation of business
processes
Business
Processes

Conceptualization
Conceptualizations of business models try to
formalize informal descriptions into building
blocks and their relationships . While many different
conceptualizations exist, Osterwalder proposed a
synthesis of different conceptualizations into a single
reference model based on the similarities of a
large range of models, and constitutes a business
model design template which allows enterprises to
describe their business model:


Osterwalder Conceptualization

Business model design template: Nine building blocks and their relationships,
Osterwalder


4 parts to the business model
Part 1- The offering – this is what the business produces
and sells
 Value proposition: The value proposition is a description
of the products and services the business offers and why
customers will be compelled to buy them. The value
proposition describes the problem the customers are
experiencing and how the products and services being
offered will help solve that problem. It describes how
the features and characteristics of the products and
services will contribute to the solution of the customers’
problem.


Part 2- Infrastructure– This is the part of the business that creates
expenses. This part describes the basic facilities, skills, manpower,
partnerships, and production process needed to exploit the business
opportunity.
 Core capabilities: The capabilities and core competencies necessary to
operate the business. This includes land, facilities, equipment, personnel and
their required skills needed to produce the products or services described in
the value proposition.
 Partner network: The business alliances needed to operate the business.
Most businesses need alliances, agreements, licenses, or other third party
assistance (legal, accounting, insurance, security, etc.) which are usually
purchased from specialized service providers.
 Value configuration: The process by which the products or services are
produced and presented to the customer. The value configuration describes
how the materials, supplies, and other required resources will be obtained and
transformed into usable products or services and how they will be made
available to buyers. It describes the process that will be used to produce the
products and services described in the value proposition.


Part 3- Customers– this is the part of the business that
generates revenue.
 Target customer: The demographics, purchasing patterns,
and location of the potential buyers of the products
described in the value proposition.
 Distribution channel: The means by which the business
delivers products and services to customers. This includes
the business's marketing and distribution strategy.
 Customer relationships: The process of interacting with the
business’s customers. It includes communicating, selling,
supporting, and assisting customers purchase and use the
business’s products or services.


Part 4- Finances – this is the part of the business that determines its
financial performance and profit
 Investment: The investment needed to obtain the facilities,
equipment, and working capital to begin or sustain operations. This
should include an itemization of these expenses and sources of
financing to obtain these funds and when they will be required.
 Cost structure: The expenses required to produce the products or
services described in the value proposition. It should include an
itemization of the expenses required by expense category and the
assumptions made to estimate these expenses.
 Revenue: The income a business receives from the sales of its products
or services. This includes sales volume and revenue projections and
the assumptions and logic used to make these projections.
 Profit, return on investment, and cash flow.

Six Components of the
Business Model
Henry Chesbrough and Richard S. Rosenbloom , Harvard Business School


Value Proposition

• A description of the customer
problem
• The solution that addresses the
problem
• The value of this solution from the
customer's perspective


Market Segment

• Recognizing that different market
segments have different needs
• Sometimes the potential of an
innovation is unlocked only when
a different market segment is
targeted


Value Chain Structure

• The firm's position in the value chain
• Activities in the value chain
• How the firm will capture part of the value that it
creates in the chain.


Revenue Generation and
Margins
• How revenue is generated
 (sales, leasing, subscription, support, etc.)
• The cost structure
• Target profit margins.


Position in the Value Network

• Identification of competitors
• Identification complementors
• Identify network effects that can be
utilized to deliver more value to the
customer
• linking suppliers and customers


Competitive Strategy

• How will the company attempt to
develop a sustainable competitive
advantage?
• How will it use that advantage to
improve the enterprise's competitive
position in the market?


Business Model vs. Strategy
Henry Chesbrough and Richard S. Rosenbloom
Business Model Strategy
Value creation and how it will be Building a sustainable competitive
captured by the firm advantage

An architecture for converting Delivering the business value to the
innovation to economic value for shareholders
business(business value)

Assumes a limited environmental Depends on a more complex analysis
knowledge that requires more certainty in the
knowledge of the environment


The Business Model and the
Business Plan
The business model is the centerpiece of the business
plan but is not the entire business plan. The
business plan should include additional information
such as:
 Administrative information
 Company name and address
 Company phone number including area code
 Email address, URL, and Logo if applicable
 Names, titles, addresses, and phone numbers of the owners or
corporate officers
 Month and year in which this business plan is issued
 Name of the business plan preparer
 Date when business was started or estimated start date


The business model and the
business plan-cont’d
 Purpose of the business and why it should be successful.
 Business objectives – what the company wants to accomplish (market
share, sales volume, revenue, return on investment, etc)
 The marketing plan.
 The competitive strategy describing how a sustainable competitive
advantage will be obtained.
 Management, the people who will manage the company and their
experience.
 Personnel plan describing the number and skills of the employees and
how they will be hired and compensated.
 A schedule describing when investment funds will be needed and for
what purpose, the sources of these funds and how they will be repaid.
 Annual revenue, expense, and cash flow projections and
assumptions upon which they are based, and critical milestones that will
define progress and results.
 Three year pro forma income statements, balance sheets, and cash flow
statements.

Case Study

Business model design template: Nine building blocks and their relationships,
Osterwalder


Case Study
Henry Chesbrough and Richard S. Rosenbloom , Harvard Business School


References and further readings
 Afuah, A. 2004, Business models: A Strategic Management Approach, McGraw-Hill, Irwin.
 Afuah, A. & C.L. Tucci 2001, Internet Business Models and Strategies, McGraw-Hill, Irwin.
 Amit, R. & C. Zott 2004, Business Strategy and Business Model: Extending the Strategy-Structure-Performance Paradigm, Strategic
Management Journal, 22, 493-520.
 Brandenburger, AM. & H. Struart 1996, Value-based Business Strategy, Journal of Economics and management strategy, pp. 5-25.
 Hamermesh, RG. & P. W. Marshall 2006, Building a Business Model and Strategy: How they Work Together, Harvard business School Press.
 Hart, Myra M. & Victoria W. Winston & Kristin J. Leib 2004, Mavens and Moguls: Creating a New Business Model, Harvard Business Review.
 Lambert, S. 2003, A Review of Electronic Commerce Literature to Determine the Meaning of the Term ‘Business Model’, School of Commerce
Research Paper Series, London.
 Magretta, Joan 2002, Why Business Models Matter, Harvard Business Review.
 Mintzberg, H. 1994, The Rise and fall of Strategic Planning, Free Press, New York.
 Porter, M. E. 1985, Competitive advantage: Creating and Sustaining Superior Performance, Free Press, New York.
 Saloner, G. Shepard & J. Podolny 2001, Strategic Management, John Wiley & Sons, London.
 Shafer, S. & H. Smith & J. Linder (2005), The Power of Business Models, Business horizon, Elsevier, Vol. 48, pp. 199-207.
 Simon, H. 1997, The New Science of Management Decision. Prentice-Hall, Englewood Cliffs, New Jersey.
 Stabell, CB. & O. D. Fieldstad 1998, Configuring Value for Competitive Advantage: on Chains, Shops and Networks, Strategic Management
Journal, Vol. 19, pp. 413-437.
 Thompson, J. D. 1967, Organization in action. McGraw-Hill, Irwin.
 Timmers, P. 1998, Business Models for Electronic Markets, Electronic Markets 8, 3-8.
 Venkatraman V. & J. C. Henderson 1998, Real Strategies for Virtual Organization, Sloan Management Review, Vol. 40, No. 1, pp. 33-48.
 The Business Model Ontology - A Proposition In A Design Science Approach, Thesis by Alexander Osterwalder , 2004
 Gill, H.: The Case for Enterprise Business Model Management. DM Review ,2000
 Hawkins R. The “Business Model” as a Research Problem in Electronic Commerce. STAR (Socioeconomic Trends Assessment for the digital
Revolution) IST Project, Issue Report No. 4, SPRU –Science and Technology Policy Research, 2001
 Pigneur Y. The E-business Model Handbook. HEC Working Paper ,2000
 Chesbrough, Henry and Richard S. Rosenbloom, , 2000. “The Dual-Edged Role of the Business Model in Leveraging Corporate Technology
Investments,” in NIST Report GCR 00-787, Managing Technical Risk – Understanding Private Sector Decision Making on Early Stage
Technology-based Projects, Lewis Branscomb, principal investigator


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