Chapter 2 Digital Business models: Review and Synthesis 2. 1 Origins of Business models While technological disruptions are changing the competitive landscape, their full impact on business structures, processes, and innovativeness are understood less and vary significantly across companies in the same industry, and may ironically be similar for companies in different industries. A primary reason for such a seemingly ††random process††is the lack of a generally accepted definition of the term ††business model††within which to provide systematic analyses. In fact multiple definitions of business models exist, which pose significant challenges for understanding essential components In general, there is no accepted definition of the term ††business model††(Shafer et al. 2005; Ho et al. 2010; Muller et al. 2011. Although, the origins of the expression business model can be traced back to the writings of Peter Drucker Ramon et al. 2009), the concept had gained prominence only in the last decade or two. Many have observed that the term ††business model††became widely adopted by practitioners during the dotcom revolution of the 1990s. While business model has been part of the business jargon for a long time, it has been argued that the focus initially involved a scientific analysis of firms has been on industry, and resources, as shown by the works of Porter (1980) and Wernerfeld (Hoyer et al 2009). ) Others, in fact, some have argued that the concept of a business model, is relatively new, dating back to only the early 1980s. Furthermore, there is little theoretical underpinning in the literature,(Linder and Cantrell 2000; Morris et al 2006; Kalantari 2010) particularly in economic theory (Teese 2010 The plethora of definitions poses significant challenges for understanding the essential components of a business model. They also lead to confusion in termi -nology as ††business model, strategy, business concept, revenue model and economic model are used often interchangeably†(and moreover) the business model has been referred to as architecture, design, pattern, plan, method assumption and statement††(Morris et al. 2005 O. A. El Sawy and F. Pereira, Business Modelling in the Dynamic Digital Space Springerbriefs in Digital Spaces, DOI: 10.1007/978-3-642-31765-1 2 ï¿The Author (s) 2013 13 For example some definitions of business models a. Baden-Fuller et al. when they define business models ††the logic of the firm, the way it operates and how it creates value for its stakeholders (2000 b. Timmers defines the business model as architecture for product, service and information flows, including a description of the various business actors and their roles; and a description of the potential benefits for various business actors; and a description of the sources of revenue (Timmers 2000 c. Mahadevan defines a business as is a unique blend of three streams that are critical to the business. These include the value stream for the business partners and the buyers, the revenue stream and the logistical stream (Mahendran 2000 d. Johnson et al. define ††Business model consists of four interlocking elements that, taken together create and deliver value†customer value proposition†profit formula†key resources†key processes††e. Ostenwalder et al. define ††A business model is a conceptual tool containing a set of objects, concepts and their relationships with the objective to express the business logic of a specific firm. Therefore we must consider which concepts and relationships allow a simplified description and representation of what value is provided to customers, how this is done and with which financial consequences (Ostenwalder et al. 2010 f. Teese, defines, ††business articulates the logic and provides data, and other evidence that demonstrates how a business creates and delivers value to cus -tomers. It also outlines the architecture of revenues, costs, profits associated with the business enterprise delivering value††(Teese 2010 g. Demil and Lecocq, define ††business model as, the description of the articula -tion between different business model components or building blocks to pro -duce a proposition that can generate value for consumers and thus for the organization††(Demil and Lecocq 2010 h. Sorescu et al. define ††a business model is specified a well system of interde -pendent structures, activities, and processes that serves as a firm†s organizing logic for value creation (for its customers) and value appropriation (for itself and its partners) ††(Sorescu et al. 2011 In addition, the concept of business models can be seen as having progressed in 5 stages as shown in Fig. 2. 1 (Gordijn et al. 2005. In the initial phase, when the term business model started to become prominent, a number of authors suggested business model definitions and classifications. Then, during the second phase authors started to complete the definitions by proposing what elements belong into a business models. Initially, these propositions were simple shopping lists, just mentioning the components of a business model. Only in a third phase followed detailed descriptions of these components (Hamel 2000; Weill and Vitale 2001 Afuah and Tucci 2003. In a fourth phase researchers started to model the com -ponents conceptually culminating in business model ontologies. In this phase models also started to be evaluated more rigorously or tested. Finally, in the fifth phase, the reference models are being applied in management and IS applications 14 2 Digital Business models: Review and Synthesis We assert that in the sixth phase, the focus is now on theory building and dynamic modeling A business model is a representation of the strategic choices that characterize a business venture. These choices are made either intentionally or by default, so the contribution of a business model is to make them explicit (Morris et al. 2005 Thus, the business model can be seen as a communication or a planning tool. It allows entrepreneurs, investors, and partners to examine strategic choices for internal consistency, to surface the assumptions of the business plan, and to understand the vision toward which the business is being built. Business model development may be part of new venture planning, but is often just as useful in sense making around a going concern, or when new opportunities and threats indicate a need for reinvention (Johnson et al. HBR 2008 Furthermore, although properly formed business models are very useful and can be a strategic tool for a firm, many business models however suffer from 4 common problems (Shafer et al. 2005), namely •Flawed or untested assumptions underlying the key premises of a firm†s busi -ness plan; these resolve around untested assumptions about future conditions, or implicit or explicit cause-and effect-relationships that are founded not well or logical •Limitations in the strategic choices considered; addressing and developing the business logic in only one ††component††of the business model, and making untested assumptions about the others •Misunderstanding about value creation and value capture; the inability of organizations to financially capitalize on the ††value††they create, which may thus negatively affect the ††revenue generation††aspects of business models •Flawed assumptions about the value network; assumptions that the current value created through the network would continue unchanged into the future and not change dynamically Define and Classify Business Models List Business Model components Describe Business Model Elements Business Model Ontology Apply Business Model concept Dynamic Business Modeling for the Future Definitions & taxonomies Shopping List of components Components as building blocks Reference models and ontologies Applications and conceptual tools Theory Driven Rappa, 2001 Timmers1998 Linder & Cantrell 2000 Margretta 2002, Amitand Zott, 2001 Afuah& Tucci 2001 & 2003 Hamel 2000 Well & Vitale 2001 Gordijn2002 Osterwald& Pigneur2002 Gordijn2002 Osterwald2004 Elsawy& Pereira, Cigref 2011 AC TI VI TY O UT CO M E AU TH O RS Fig. 2. 1 Progression of business model studies 2. 1 Origins of Business models 15 Table 2. 1 summarizes some of the attempts to capture the concept of business models over the last two decades or so. The number of components proposed in each model ranges from 3 to 9. In general, three general categories of definitions based on their emphasis, namely economic, operational and strategic, each with their unique set of decision variables have been identified (Morris et al. 2005. The economic approach focuses on how a firm can make a profit and key variables from this approach include revenue sources, pricing methodologies, cost struc -tures, margins and expected volumes. Fundamentally stated, this approach deals with how a firm can make money and sustain its revenue stream into the future Stewart et al. 2000. Alternatively, the operational approach focuses on the firm†s internal processes and design of infrastructure that enables firms to create value with key components such as production or service delivery methods, adminis -trative processes, resource flow and knowledge management, with the objective of key designing interdependent systems that create and sustain a competitive busi -ness (Mayo and Brown 1999. In the strategic approach, emphasis in on the overall direction of the firm†s marketing position, interactions across organizational boundaries, and growth opportunities. This approach espouses the totality of how a firm selects its customers, defines and differentiates its offerings, creates utility for its customers, define the tasks it will perform or outsource, configures its resources and ultimately captures profits (Slywotzky 1996. Decision variables focus on stakeholder identification, value creation, visions, values and networks and alliances 2. 2 Why Digital Business models The role of information technology and its relationship to the business has shifted over the last 20 years. We have progressively transitioned from a focus on the design of information systems, to the design of IT-enabled business processes, and more recently to the design of business models for services provided through digital platforms (Fig. 2. 2). While this attention to business models for digital platforms initially started in the networked digital industry (telecom, media entertainment, gaming. software, etc. it is increasingly being propagated to all industries whether healthcare, energy, retail, or financial services. As more cus -tomers consume products and services offered through digital platforms, the managerial stakes in understanding those models is becoming much higher especially when these products and services have to be offered to and priced for consumers. A review of Table 2. 1 also illustrates that most of the espoused busi -ness models do not consider explicitly the effects of digital platforms specifically Thus, digital business ecosystems are new and different. Companies operate in a technology-enabled and digitally interconnected environment characterized by new affordances, structures, and rules (El Sawy et al. 1999). The information systems discipline has explored and explicated many of these differences. One of its most important conclusions is that technology and business are fused effectively 16 2 Digital Business models: Review and Synthesis Table 2. 1 Comparison of business model approaches Source Components Number of components Eco -system Digital platform Horowitz (1996) Price, product, distribution organizational characteristics and technology 5 No Some Viscio and Pasternak 1996 Global core, governance, business units, services and linkages 5 No No Timmers (1998) Product/service/information flow architecture, business actors and roles, actor benefits revenue sources, and marketing strategy 5 No Some Markides (1999) Product innovation, customer relationship, infrastructure management, and financial aspects 4 No No Donath (1999) Customer understanding marketing tactics, corporate governance and intranet /extranet capabilities 4 No No Mahadevan (2000) Value stream, revenue stream logistical stream 3 No No Gordijn et al. 2001) Actors, market segments, value offering, value activity stakeholder network, value interfaces, value ports and value exchanges 8 No No Linder and Cantrell 2001 Pricing model, revenue model channel model, commerce process model, internet -enabled commerce relationship, organizational form and Value proposition 8 No Some Chesbrough and Rosenbaum (2000 Value proposition, target markets internal value chain structure cost structure and profit model value network and competitive strategy 6 No No Gartner (2003) Market offerings, competencies core technology investments and bottom line 4 No Some Hamel (2001) Core strategy, strategic resources value network and customer interface 4 No No Petrovic et al. 2001) Value model, resource model production model, customer relations model, revenue model, capital model, and market model 7 No No continued 2. 2 Why Digital Business models 17 Table 2. 1 (continued Source Components Number of components Eco -system Digital platform Dubosson-Torbay et al. Products, customer relationship infrastructure and network of partners, and financial aspects 4 No Some Afuah and Tucci (2001) Customer value, scope, price revenue, connected activities implementation, capabilities and sustainability 8 No Some Weill and Vitale (2001) Strategic objectives, value proposition, resource sources success factors, channels, core competencies, customer segments, and IT infrastructure 8 No No Applegate (2001) Concept, capabilities and value 3 No No Amit and Zott (2001) Transaction content, transaction structure and transaction governance 4 No No Alt and Zimmerman 2001 Mission, structure, process revenues, legalities and technology 6 No No Rayport and Jaworski 2001 Value cluster, market space offering, resource system, and financial model 4 No No Bertz (2002) Resources, sales, profits and capital 4 No No Hedman and Kalling 2003 Value network, resources capabilities, revenue and pricing, competitors, output management 7 Some No Chesbrough (2003) Customer, value network capabilities, revenue and pricing, cost, strategy 6 Some No Rappa (2004) Types: Brokerage, advertising infomediary, merchant manufacturer (direct), affiliate community, subscription utility 9 Some No Stanoevska-Slabeva and Hoyer (2005 Features of specific product features of specific medium customers, value chain financial flow, goods and services, societal environment 7 No No Osterwalder and Pignuer (2009 Customer segments, value propositions, channels customer relationships, revenue streams, key resources, key activities, key partnerships cost structures 9 Some No continued 18 2 Digital Business models: Review and Synthesis into one fabric†it no longer makes sense to talk about information technology as a tool or environment that is kept at arm†s length from business activities (El Sawy 2003). ) To theorize about new business models and by adding a few ††digital††features to the theory would lead to what we call the ††horseless carriage††fallacy That term for the first automobiles constrained the imagination and blinded inventors to the fact that the new design challenge was fundamentally different than the old. We realize that a theory of digital business models and digital service must integrate the distinct attributes of digital business ecosystems from the get-go Yoo et al. 2010. There are at least three such attributes: time compression turbulence, and new architectures 2. 3 New Architectures Digital business ecosystems feature not only idiosyncratic technological archi -tectures (Yoo et al. 2010) but also important new interorganizational business architectures. Responding to the velocity and turbulence of the environment, and taking advantages of the affordances of digital technology, firms and groups of firms have been prolific in establishing digital platforms for the combination of technologies and the delivery of services (Gawer and Cusumano 2008. Platforms Table 2. 1 (continued Source Components Number of components Eco -system Digital platform Al-Debei and Avison 2010 Value proposition, value architecture, value finance value network (integrated approach 4 Yes No Adapted from Morris et al. op cit. and Schafer et al. op cit IT Connection View (1970-95 IT Immersion View 1991-2011) Fusion View 2004 -IT IT IT as Tool IT as Environment IT as Fabric Fig. 2. 2 Changing role of technology in business 2. 2 Why Digital Business models 19 are standards or architectures that allow modular substitution of complementary assets (West 2003. Taking advantage of the digital affordance of modularity platforms enable firms to focus their attention (and innovation) on one part of a system at a time, and to assemble those parts†whether they are products or activities†into a variety of configurations. As business models have become more digital, firm capabilities themselves have become more modular, more easily connectable, and more conveniently shareable. In prior decades it might have taken a formal alliance and a joint venture to make one firm†s technology com -patible with another†s, but today, riding on rails of application programming interfaces (APIS) and broadband fiber optics, we can ††mash up††digital services like Google†s maps and Facebook†s social newsfeed in no time and on a shoestring budget. Digital business ecosystems enable the possibility of combining capabil -ities across boundaries into innovative new offerings and solutions to create and capture value (Schlagwein and Schoder 2011 20 2 Digital Business models: Review and Synthesis http://www. springer. com/978-3-642-31764-4 2 Digital Business models: Review and Synthesis 2. 1†Origins of Business models 2. 2†Why Digital Business models 2. 3†New Architectures
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