Defining a business model

4.2 Defining a business model

Any organization irrespective of its age or form needs a well functioning business model in order to be successful. Several definitions of the business model concept have been proposed,

a common feature being the use of synonyms regarding the structure of how a business works such as architecture, coordinated plan, representation and design (Chesbrough & Rosenbaum, 2000; Dubosson-Torbay, Osterwalder, & Pigneur, 2001; Mayo & Brown, 1999; Shafer, Smith, & Linder, 2005; Venkatraman & Henderson, 1998). This sense of structure is tied with an answer to ‗how‘ the firm provides value and generates revenue (Boulton, Libert, & Samek, 2000). A description of a business model is meant to relay pertinent information regarding a business in a coherent, succinct fashion. Examples of definitions include: ―The architecture for product, service and information flows...‖ (Timmers, 1998), ―A depiction of the content, structure and governance of transactions…‖ (Amit & Zott, 2001), and ―A coordinated plan to design strategy along three vectors: customer interaction, asset configuration and knowledge leverage‖ (Venkatraman et al., 1998). Essentially, therefore, a firm‘s business model relates to organizational design (Zott & Amit, 2007) and has to do with how firms architecturally design how they do business.

In this study we have adopted Magretta‘s definition of a business model. Magretta (2002:4) sees a business model as a story that explains how the organization works and how the different elements of the business fit together. She argues that a good story requires precisely delineated characters, plausible motivations, and a plot that turns on an insight about value. Similarly, if a business model is to be seen as a good story it requires that all characters important for the business are clearly identified and their relations with each other are clear; that the entrepreneur is able to attract the customer to her idea and is able to create a reason for turning the attraction into a behavioral pattern, i.e. buying.

As Magretta (2002) notices the process of creating a business model is like the process of writing a new story. To certain degree all new stories are variations on old themes, they all cover aspects of human interest and experience, but they differ slightly in how they do it. So are the businesses, they seem very alike from outside but their operations often differ in a number of ways. To be able to assess which business models are viable and have potential to turn the business into successful story, the business model needs to pass two tests. The plot needs to be interesting and engaging, which means that the value chain needs to make sense both on the side associated with making something and the side concerned with selling something. In that sense the factor side and the market side can be distinguished in the business model, and both need to work for a business model to be viable (see figure 4.1).

Figure 4.1 Business model (adapted from Magretta, 2002)

In particular, both sides are concerned with the individuals or organizations that interact with the focal firm, the kind of transactions that are taking place, the money making process and knowledge sharing and learning. For example, the ―structural template‖ (Zott et al., 2007), the description of relations the focal firm has with its environment is important for delineating the value chain and the transactions between agents that lead to value creation. Furthermore, the nature of these transactions influences on one hand the value for the customer as well as the potential for money making for the entrepreneur. This is implicitly linked to the knowledge flows. Knowledge is often implicit in the discussions of business models. Some researchers emphasize the ability to create value for the customer and the ability to identify sources of competence in the elements of business model (for example, Morris, Schindehutte, & Allen, 2005) while others see knowledge as a resource (for example, Schweizer, 2005).

Thus, to understand the differences between various business models attention to inherent value proposition as well as to the adopted revenue models is required (Magretta, 2002). Value proposition focuses on how the value is created, i.e. the scope of the venture. Specifically, whether the firm is offering only products, or only services, or a mix of the two; and whether any kind of customization is taking place, whether there are any product/services bundles. Intertwined with the question of how the value is created is the question for whom the value is created. This means that target customers need to be identified and in the case of different customer groups value propositions may differ depending on the target group, for example different offering and different value depending whether customers are individuals or groups; or depending on whether they are local customers or visitors. The expectations of the different groups often differ and thus this requires different offering for each of them.

On the other hand, knowing who the customers are requires the venture to answer the question how it wants to position itself and thus which revenue models to adopt. To answer the basic question of how to make money the venture needs to decide how flexible the pricing should be, whether the venture intends and has capabilities to serve high or low volumes of customers and whether they will be able to achieve relatively high or low margins. Thus, the On the other hand, knowing who the customers are requires the venture to answer the question how it wants to position itself and thus which revenue models to adopt. To answer the basic question of how to make money the venture needs to decide how flexible the pricing should be, whether the venture intends and has capabilities to serve high or low volumes of customers and whether they will be able to achieve relatively high or low margins. Thus, the