The sense and nonsense of Business Models 1

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1 The sense and nonsense of Business Models 1 Position Paper, International Workshop on Business Models HEC Lausanne Lausanne 4-5 October 2002 Harry Bouwman Faculty of Technology, Policy and Management Delft University of Technology PO Box GA Delft The Netherlands (fax) H.Bouwman@tbm.tudelft.nl 1 This contribution is based on studies that have been conducted together with Dialogic Innovative and Interactive and were commissioned by ECP.NL and the Place research of the Telematica Instituut. The author wishes to thanks Christiaan Holland of Dialogic, Rene Wagenaar of the Delft Technical University and Sander Hille of the Telematica Instituut for their comments and discussions. 1

2 "It was intellectually challenging to imagine how the business would work, but it was also alarming to realise that the theories of how the business model for the Internet would come together changed in fundamental ways as often as every month". (Michael Wolf 1998, p.56). Michael Wolf s quote illustrates how dot.coms have been looking anxiously for ways of making money through the Internet. Perhaps for the majority of dot.coms we should add: ways they could have made money. Before going on, I would like to emphasize two things with regard to the hype surrounding e-commerce and the Internet. First of all, it has been a costly learning process and it is important to remember the lessons we have learned during the dot.com crisis. Secondly, research shows that it is not the all virtual companies that benefit from using Internet-technologies in their business processes, but rather the more traditional companies ( In our view, what is important is that a company have a clear strategy. This strategy can be conceptualized at an abstract level through the term business model. Both in business literature and in scientific literature authors use the concept of the business model, without there being a great deal of clarity as to what it is they mean. In this contribution I want to address the following questions: What is a business model? What business models are there? Is it not more meaningful to talk of business cases? How do business cases relate to business modelling, to the design of business processes? What role do channels play: physical channels, the Internet, call centres etc. Which activities are money-makers? And which are not? In the description of these various questions Figure 1 serves as a starting point. In our view there are a number of business models that are integrated in a company s strategy. In those instances we speak of business cases. On the one hand the strategy depends on the capabilities (possibilities), the sources within the organization, among other things the ITinfrastructure etc., while on the other hand a strategy also defines what value a company wishes to offer to whom and in what market. The choices that are made determine the central processes within the organization and the (combination of) channels that will be used to reach the customer and offer value to that customer. The business case also explain how the organization thinks it will make money. A choice is made in favour of certain revenue models. We will shed light on the various elements in the course of this article. Business models: a definition Although the concept of business model is used a lot and people assume that everybody means the same when using it, there is a great deal of uncertainty about what a business model is. The concept of business model is not a common sense term. There is no generally accepted definition or classification of business models. Both in scientific circles and in the business community the term is often used without providing a clear definition. Nevertheless, the concept is considered very important. Many people implicitly assume that a clearly formulated business model determines the potential results and future success of an e- business initiative. The thinking on business models is as yet little articulated. In literature, when the concept is discussed, it is sometimes to do with market structures and the place of individual companies within those structures, sometimes it is about the choice in favour of a product-market combination or about a model for coordination within economic processes. Sometimes it deals with the implementation of a specific market model, for example the English auction. In the description of business models preciously little attention is paid to sector-specific circumstances. In many cases only a general distinction is drawn between business-to- 2

3 business (B2B) and business-to-consumer (B2C) markets. In other cases certain aspects are specifically emphasized, for instance the B2C-model for the retail sector. In our definition a business model provides a description of the roles and relationships of a company, its customers, partners and suppliers, as well as the flows of goods, information and money between these parties and the main benefits for those involved, in particular, but not exclusively the customer. In this article we will use this description, which was first suggested by Weill & Vitale (2000), not because it is the best or the only valid one, but because these definitions emphasize a number of relevant issues, such as the network or value web within which a company operates and the differences between the flows of goods, information and money. Other comparable definitions that are often quoted are those proposed by Slywotsky (1996) and Timmers (1998, 1999). Their definitions contain the same elements. Before addressing the various relevant aspects and elements of business models it is useful to list the business models that are available. A classification of business models There are many classifications of business models (for a listing see Holland, Bouwman and Smidts, 2001). These classifications vary in how detailed and specific they are. The best known and most extensive listing is the one provided by Rappa (2000), who distinguishes ten main models and 23 sub-models. Other authors also arrive at listings with an impressive attention to detail. Many of these models can be reduced to a limited number of basic types. We would like to propose using the term business model to describe these basic models. In our view, these are the basic models: Content Providers offer content (information, digital products and services), including advertising, either independently or through intermediaries (Cf. CNN, Trouw.nl); Direct to Customer: these offer products and services directly to the end-user (Cf. Nike); Full Service Providers offer a wide range of services within a specific domain (financial services, health, travel, the Internet), both directly and through third parties (Cf. Achmea, Travel Planet). Basically, the customer and direct all his questions and needs within a certain domain at one provider. ISPs, for example, provide Internet access and ASPs provide software that operates on the basis of a client-server architecture; Intermediaries bring supply and demand together by bundling information, such as electronic malls (macropolis, by now defunct), portals (Yahoo, Ilse), auctions (ebay, Ricardo) or electronic markets (DSM.com); Value Net Integrators coordinate activities around a value web, by collecting, bundling and distributing information (Cf. Cisco). They more or less provide an environment that can be compared to that of a Full Service Provider, but the business model is focused in particular on the coordinating role of the provider; Virtual Communities create and facilitate online communities around a specific theme (Oudersvannu.nl) 2. And finally The counter model. These providers offer a wide range of services through a single access point, from a single organization with various business unites (Cf. OfficeDepot/Viking Direct or government departments) or from a number of different organizations. In our view this list provides fairly complete description of the various business models available. We must stress that these archetypes do not or hardly exist in the real world in their pure form. Every company combines a number of business models in the way it conducts its day-to-day activities. We refer to such a combination of business models and the way they are implemented at the operational level as a business case. 2 Parents today 3

4 Business cases Business models are abstractions of everyday business practice. In theory it is easy to name and describe business models, but it is only at the level of a business case that a model or combination of models proves its value. A specific business model can be very useful to a certain economic sector, industry or branch or to a certain geographical market, and at the same time be utterly useless to another sector, industry, branch or geographical market. A business case is a specific application of a (combination of) business model(s) by an individual company in a specific market. The CD-NOW concept that is by now integrated into the Bertelsmann group, for example, used both direct sales to customers and an affiliation model. The choice of business model or combination of business models in a business case depends on the organization s strategy, possibilities, capabilities and resources and the value it seeks to offer its customers with its products or services. The applicability of the various models heavily depends on the products and services being offered. Usually, a distinction is made between tangible, physical, material and non-tangible, non-material products (software, music, information, advice). Non-material products and services are easy to sell and deliver through electronic networks. However, there are additional qualities that determine whether or not a product is suitable to e-business. Homogenous products with relatively constant quality and characteristics are easier to sell via electronic markets than are products that are more diverse in shape and quality. The specificity of a product for instance one that can only be consumed at a predetermined location (location-specific); physical specificity (a CAD-CAM-programme that can only be connected to a mould of a specific product); person-specific products (knowledge and expertise of an individual), and time-specific products (limited lifespan) help determine whether or not a product is suitable to be sold using e-business. The characteristics of products or services influence the business model being used. Strategy is about determining the overall vision, the strategic goals and the value propositions, but also about the basic characteristics of a product or service a company wants to offer. Basically, this tells us nothing new. Business models focus on the way in which the possibilities of the Internet, e-business and e-commerce can be incorporated in a new and creative manner. This goes beyond the basic technology, hardware or software and has to do with the new business concepts (cases) that become available. The strategy to a large extent depends on the environment within which the company operates. It has to do with: actors and their role within a specific business environment (a complex value system or a value web); the specific sector, customers and products the company focuses on, and the changes that are brought about by new technologies such as the Internet. Business models and business modelling The strategy and the environment largely determine the processes that lie at the basis of the business cases. It is the concrete implementation of the business case in operational terms: it centres around the value creation process and the question how best to anticipate customer processes by using Internet technology. In addition to the knowledge and skills of a company s personnel, an important role is played here by information and communication technology (ICT). ICT is both an enabler of and a constraint on business cases. A clear description and modelling of the processes provides a valuable insight into the goods and information flows. This is the domain of business modelling. The aim of modelling is to develop software modules and IT-architecture in support of processes within and between organizations. Business modelling helps provide insight into how existing organizations can integrate the Internet into their business processes. 4

5 In particular with regard to the use of combinations of various channels in the transaction process there are enormous benefits for e-business companies. A business case can focus on all or just a few steps in the sales process that take place electronically. Often, the following five steps are identified: Information gathering: this can either be collecting electronically information regarding the company in question or, more specifically, geared towards a specific product or its price; Purchase (order process). This step contains an actual transaction component and is usually associated with e-commerce. It has to do either with a direct electronic transaction (for instance by filling out an HTML form), or with an indirect electronic order/purchase, for example on the basis of electronically provided information in the form of an address, a telephone or fax number or even a physical address, where there is no face-to-face contact; Fulfilment. Certain (intangible) products can increasingly be delivered electronically as well, such as, for instance, information products, access to databases, software, music and gambling services. Or it may involve electronic tracking & tracing; Payment: completing the online transaction. This may involve certain forms of online payment, for instance electronic banking, Trusted Third Parties (TTPs) or credit cards. Credit lines or payment on delivery is also possible; Customer support (after-sales services). Customers increasingly have to option to obtain support electronically with the regard to the use of products, for example through electronic helpdesks or other client support systems. The degree to which these phases are completed electronically varies enormously. There are products whereby all phases are completed electronically (for example the ordering and supply of a report). There are also products whereby only payment is conducted electronically or where the only online component is the gathering of information and where the actual purchase takes place offline. Business cases will as a rule specify which elements will be conducted via the Internet and which will not. Business models and synergy effects The most interesting business cases are those whereby a company attempts to establish an intelligent combination of existing channels: physical outlets, the Internet, mobile applications, call centres, etc. These are so-called synergy strategies that combine physical with virtual presence (Steinfeld et al., 2000). This means that in various phases of the transaction process the physical and/or virtual channels are used. These hybrid applications seem particularly suitable for traditional companies, such as the Free Record Shop, Bruna, KPN primafoon online, etc., who already have a physical presence. It is already clear that these bricks & clicks companies, that come from traditional sectors, are in an advantageous position vis-á-vis the (purely virtual) dot.coms. These synergy effects increase the value for the customers (for examples see Revenue models An important aspect of business models and cases are the underlying financial flows, the revenues and costs associated with e-business. As is the case with business models, there are a number of basic models that are often used in combination in specific cases. In our view, the basic revenue models are the following: advertising revenues, transaction revenues, generating income from the temporary management of funds (the so-called float), revenues from subscriptions or licensing agreements and the pay per or utility model. 5

6 Conclusion On the basis of the conceptual model described above we analyse in the framework of the Business Models for Innovative Telematics Applications- (BiTA)project a number of cases with a complex value system. In this joint project of Delft Technical University, TNO and the Telematica Instituut we hope to help companies to accelerate business innovations that are made possible by the Internet and ICT, both on the basis of various indicators we will develop for the concept listed above, a number of cases studies, and methods to translate insights from existing cases to future cases. The attention for business models is especially related to the rise of the Internet and of dot.com companies. These companies were looking for a way to shape their business activities, what value they should offer their customers, what the underlying technology should be and how they could make money doing all this. Much (nonsense) has been written with regard to business models in this context. Often no attempts were made to clearly delineate the term. In this article that is exactly what we have attempted to do. Business models provide a description of the roles and relationships of a company, its customers, partners and suppliers and the main benefits for the parties involved, in particular, but not exclusively, the customer (customer value). Business models only mean something at the concrete level of a business case. As a rule, a business case combines aspects of various business models. A systematic analysis based on the capabilities of an organization with regard to what products and services it provides and what channels it uses to do so, as well as what information and money flows can be identified, is an extremely meaningful activity. References Holland, C., H. Bouwman & M. Smidts (2001). Return to the Bottomline. Leidschendam. ECP.NL. ISBN , Rappa, M (2000). Managing the digital enterprise. Steinfield Ch., H Bouwman, & Adelaar, T. (2001). Combining Physical and Virtual Channels: Opportunities, Imperatives and Challenges. Paper presented to e-everything: e-commerce, e-government, e-household, e-democracy 14 th Bled Electronic Commerce Conference Bled, Slovenia, June 25-26, P Steinfield, C., Bouwman H. et al. (2001). Pillars of Virtual Enterprises: Leveraging Physical Assets in the New Economy. In: Info, Vol.3 No. 3 June 2001, Slywotzky, A.J. (1996). Value Migration. How to think several moves ahead of the competition. Boston: Harvard Business Press Timmers, P. (1998). Business models for E-commerce. Electronic Markets, 8 (2) 3-7. (wwww.electronicmarkets.org) Timmers, P. (1999). Electronic Commerce Strategies and models for business-to-business trading. Chichester: John Wiley publisher. Weill, P. & M.R. Vitale 92001). Place to Space. Migrating to e-business Models. Boston: Harvard Business School Press. 6