A business model describes the rationale An explanation is a set of statements constructed to describe a set of facts which clarifies the causes, context, and consequences of those facts of how an organization An organization is a social arrangement which pursues collective goals, controls its own performance, and has a boundary separating it from its environment. The word itself is derived from the Greek word organon, itself derived from the better-known word ergon creates, delivers, and captures value^[1] - economic, social, or other forms of value. The process of business model design is part of business strategy Strategic or institutional management is the conduct of drafting, implementing and evaluating cross-functional decisions that will enable an organization to achieve its long-term objectives. It is the process of specifying the organization's mission, vision and objectives, developing policies and plans, often in terms of projects and programs,.

In theory and practice the term business model is used for a broad range of informal and formal descriptions to represent core aspects of a business A business is a legally recognized organization designed to provide goods or services, or both, to consumers, businesses and governmental entities. Businesses are predominant in capitalist economies. Most businesses are privately owned. A business is typically formed to earn profit that will increase the wealth of its owners and grow the business, including purpose, offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies.

History

Whenever a business is established, it either explicitly or implicitly employs a particular business model that describes the design or architecture of the value creation, delivery, and capture mechanisms employed by the business enterprise. The essence of a business model is that it defines the manner by which the business enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit: it thus reflects management’s hypothesis about what customers want, how they want it, and how an enterprise can organize to best meet those needs, get paid for doing so, and make a profit (David Teece 2010). Business models are used to describe and classify businesses (especially in an entrepreneurial setting), but they are also used by managers inside companies to explore possibilities for future development, and finally well known business models operate as recipes for creative managers (Charles Baden-Fuller and Mary Morgan, 2010).

Over the years, business models have become much more sophisticated. The bait and hook business model (also referred to as the "razor and blades business model Freebie marketing, also known as the razor and blades business model, is the concept of either giving away a salable item for nothing or charging an extremely low price to generate a continual market for another, generally disposable, item. The concept was pioneered by King C. Gillette, inventor of the disposable safety razor and founder of" or the "tied products business model") was introduced in the early 20th century. This involves offering a basic product at a very low cost, often at a loss (the "bait"), then charging compensatory recurring amounts for refills or associated products or services (the "hook"). Examples include: razor (bait) and blades (hook); cell phones (bait) and air time (hook); computer printers (bait) and ink cartridge refills (hook); and cameras (bait) and prints (hook). An interesting variant of this model is a software developer that gives away its word processor reader free of charge but charges several hundred dollars for its word processor writer.

In the 1950s, new business models came from McDonald's McDonald's Corporation is one of the world's largest chain of hamburger fast food restaurants, serving nearly 47 million customers daily Restaurants and Toyota Toyota Motor Corporation , commonly known simply as Toyota and abbreviated as TMC, is a multinational corporation headquartered in Japan. In 2009, Toyota Motor Corporation employed 71,116 people worldwide (total Toyota 320,808). TMC is the world's largest automobile maker by sales and production. In the 1960s, the innovators were Wal-Mart Wal-Mart Stores, Inc. (NYSE: WMT) is an American public corporation that runs a chain of large discount department stores and a chain of membership required warehouse stores. In 2010 it was the world's largest public corporation by revenue, according to the Forbes Global 2000 for that year. The company was founded by Sam Walton in 1962, and Hypermarkets In commerce, a hypermarket is a superstore which combines a supermarket and a department store. The result is a very large retail facility which carries an enormous range of products under one roof, including full lines of groceries and general merchandise. In theory, hypermarkets allow customers to satisfy all their routine weekly shopping needs. The 1970s saw new business models from FedEx FedEx Corporation , originally known as FDX Corporation, is a logistics services company, based in the United States with headquarters in Memphis, Tennessee. The name "FedEx" is a syllabic abbreviation of the name of the company's original air division, Federal Express, which was used from 1973 until 2000 and Toys R Us Toys "R" Us, officially trademarked as Toys Я Us, is a toy store chain based in the United States. The chain also has locations in Europe, Asia, Oceania, Africa, and Canada. The company currently operates 860 stores in the United States and 716 stores in 34 other countries, with some of them under franchises or licenses. The flagship; the 1980s from Blockbuster Blockbuster Inc. is an American-based chain of DVD, Blu-ray, and video game rental stores. There are more than 9,000 stores in 25 countries worldwide. It is headquartered in the Renaissance Tower in Downtown Dallas, Texas, Home Depot The Home Depot is an American retailer of home improvement and construction products and services. The Home Depot operates 2,193 big-box format stores across the United States (including all 50 U.S. states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam), Canada (all ten provinces), Mexico and China. The Home Depot is, Intel Intel Corporation is a technology company, and the world's largest semiconductor chip maker, based on revenue. It is the inventor of the x86 series of microprocessors, the processors found in most personal computers. Intel was founded on July 18, 1968, as Integrated Electronics Corporation (though a common misconception is that "Intel", and Dell Computer Dell Inc. is a multinational information technology corporation that develops, sells and supports computers and related products and services, as a merchant. Based in Round Rock, Texas, United States, Dell employed more than 76,500 people worldwide as of 2009[update]; the 1990s from Southwest Airlines Southwest Airlines Co. is an American low-cost airline. Southwest is the largest airline in the world by number of passengers carried per year (as of 2009). Southwest maintains the third-largest passenger fleet of aircraft among all of the world's commercial airlines. As of May 3, 2009, Southwest operates approximately 3,510 flights daily, Netflix Netflix is a service offering online flat rate DVD and Blu-ray Disc rental-by-mail and video streaming in the United States, eBay eBay Inc. is an American Internet company that manages eBay.com, an on-line auction and shopping website in which people and businesses buy and sell a broad variety of goods and services worldwide. Founded in 1995, eBay is one of the notable success stories of the dot-com bubble; it is now a multi-billion dollar business with operations localized, Amazon.com Amazon.com, Inc. is an American-based multinational electronic commerce company. Headquartered in Seattle, Washington, it is America's largest online retailer, with nearly three times the Internet sales revenue of the runner up, Staples, Inc., as of January 2010, and Starbucks Starbucks Corporation is an international coffee and coffeehouse chain based in Seattle, Washington, United States. Poorly thought out business models were a problem with many dot-coms A dot-com company, or simply a dot-com , is a company that does most of its business on the Internet, usually through a website that uses the popular top-level domain, ".com" (in turn derived from the word "commercial").

Today, the type of business models might depend on how technology is used. For example, entrepreneurs on the internet have also created entirely new models that depend entirely on existing or emergent technology. Using technology, businesses can reach a large number of customers with minimal costs.

Examples

• Auction business model An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder. In economic theory, an auction may refer to any mechanism or set of trading rules for exchange
• Bricks and clicks business model Bricks-and-clicks is a business model by which a company integrates both offline and online (clicks) presences. It is also known as click-and-mortar or clicks-and-bricks, as well as bricks, clicks and flips, flips referring to catalogs. One of the most major examples of this is Wal-Mart's Site-to-Store centers
• Collective business models
• Component business model Component Business Model is a technique developed by IBM to model and analyze an enterprise. It is a logical representation or map of business components or "building blocks" and can be depicted on a single page. It can be used to analyze the alignment of enterprise strategy with the organization's capabilities and investments, identify
• Cutting out the middleman In economics, disintermediation is the removal of intermediaries in a supply chain: "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate , companies may now deal with every customer directly, for example via the Internet. One important factor is a drop in the cost of model
• Direct sales model Direct selling is a retail channel for the distribution of goods and services. At a basic level it may be defined as marketing and selling products, direct to consumers away from a fixed retail location. Sales are typically made through party plan, one to one demonstrations, and other personal contact arrangements. A text book definition is: "
• Distribution business models Physical distribution is one of the four elements of the marketing mix. An organization or set of organizations (go-betweens) involved in the process of making a product or service available for use or consumption by a consumer or business user, various
• Fee in, free out
• Franchise Franchising is the practice of using another firm's successful business model. The word 'franchise' is of anglo-french derivation - from franc- meaning free, and is used both as a noun and as a verb
• Freemium business model Freemium is a business model that works by offering basic Web services, or a basic downloadable digital product, for free, while charging a premium for advanced or special features. The word "freemium" is created by combining the two aspects of the business model: "free" and "premium". The business model has gained
• Industrialization of services business model
• Low-cost carrier business model A low-cost carrier or low-cost airline is an airline that generally has lower fares. To make up for revenue lost in decreased ticket sales, the airline may charge for extras like food, priority boarding, seat allocating, and baggage etc
• Loyalty business models The loyalty business model is a business model used in strategic management in which company resources are employed so as to increase the loyalty of customers and other stakeholders in the expectation that corporate objectives will be met or surpassed. A typical example of this type of model is: quality of product or service leads to customer
• Monopolistic business model In economics, a monopoly (from Greek monos / μονος + polein / πωλειν (to sell)) exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. (This is in contrast to a monopsony which relates to a
• Multi-level marketing business model Multi-level marketing , (also called network marketing, direct selling, referral marketing, and pyramid selling) is a term that describes a marketing structure used by some companies as part of their overall marketing strategy. The structure is designed to create a marketing and sales force by compensating promoters of company products not only
• Network effects business model In economics and business, a network effect is the effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service increases as more people use it
• Online auction business model The online auction business model is one in which participants bid for products and services over the Internet. The functionality of buying and selling in an auction format is made possible through auction software which regulates the various processes involved
• Online content business model
• Premium business model
• Professional open-source model Professional open-source is a business model that many open-source software vendors are attempting to follow. The model partners what is perceived as "free" open-source software with paid professional services
• Pyramid scheme business model A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service being delivered. The FBI considers pyramid schemes a form of fraud
• Razor and blades business model Freebie marketing, also known as the razor and blades business model, is the concept of either giving away a salable item for nothing or charging an extremely low price to generate a continual market for another, generally disposable, item. The concept was pioneered by King C. Gillette, inventor of the disposable safety razor and founder of (bait and hook)
• Servitization of products business model Service economy can refer to one or both of two recent economic developments. One is the increased importance of the service sector in industrialized economies. Services account for a higher percentage of US GDP than 20 years ago. The current list of Fortune 500 companies contains more service companies and fewer manufacturers than in previous
• Subscription business model The subscription business model is a business model where a customer must pay a subscription price to have access to the product/service. The model was pioneered by magazines and newspapers, but is now used by many businesses and websites. Rather than selling products individually, a subscription sells periodic use or access to a product or
• All-in-one business model

Business model design template

Formal descriptions of the business become the building blocks for its activities. Many different business conceptualizations exist; Osterwalder's work and thesis (2010^[1], 2004^[2]) propose a single reference model based on the similarities of a wide range of business model conceptualizations. With his business model design template, an enterprise can easily describe their business model

• Infrastructure
  • Key Activities: The activities necessary to execute a company's business model.
  • Key Resources: The resources that are necessary to create value for the customer.
  • Partner Network: The business alliances A business alliance is an agreement between businesses, usually motivated by cost reduction and improved service for the customer. Alliances are often bounded by a single agreement with equitable risk and opportunity share for all parties involved and are typically managed by an integrated project team. An example of this is code sharing in which complement other aspects of the business model.
• Offering
  • Value Proposition A value proposition is an analysis and quantified review of the benefits, costs and value that an organization can deliver to customers and other constituent groups within and outside of the organization. It is also a positioning of value, where Value = Benefits - Cost: The products and services a business offers. Quoting Osterwalder (2004), a value proposition "is an overall view of .. products and services that together represent value for a specific customer segment. It describes the way a firm differentiates itself from its competitors and is the reason why customers buy from a certain firm and not from another."
• Customers Business Model Canvas: Nine business model building blocks, Osterwalder, Pigneur, & al. 2010^[1]
  • Customer Segments: The target audience for a business' products and services.
  • Channels: The means by which a company delivers products and services to customers. This includes the company's marketing Marketing is the process by which companies create customer interest in products or services. It generates the strategy that underlies sales techniques, business communication, and business development. It is an integrated process through which companies build strong customer relationships and create value for their customers and for themselves and distribution Physical distribution is one of the four elements of the marketing mix. An organization or set of organizations (go-betweens) involved in the process of making a product or service available for use or consumption by a consumer or business user strategy.
  • Customer Relationship: The links a company establishes between itself and its different customer segments. The process of managing customer relationships is referred to as customer relationship management Customer relationship management is a broadly recognized, widely-implemented strategy for managing and nurturing a company’s interactions with clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing, customer service, and.
• Finances
  • Cost Structure: The monetary consequences of the means employed in the business model. A company's DOC.
  • Revenue Streams: The way a company makes money through a variety of revenue flows. A company's income.

Applications

Malone Thomas W. Malone is the Patrick J. McGovern Professor of Management at the MIT Sloan School of Management. He is also the founder and director of the MIT Center for Collective Intelligence and was one of the two founding co-directors of the MIT Initiative on "Inventing the Organizations of the 21st Century". Professor Malone teaches et al.^[3] at MIT The Massachusetts Institute of Technology is a private research university located in Cambridge, Massachusetts. MIT has five schools and one college, containing a total of 32 academic departments, with a strong emphasis on scientific and technological research. MIT is one of two private land-grant universities[b] and is also a sea-grant and space- find that some business models, as defined by them, indeed performed better than others in a dataset consisting of the largest U.S. firms, in the period 1998 through 2002, while they did not prove whether the existence of a business model mattered.

Related concepts

The process of business model design is part of business strategy Strategic or institutional management is the conduct of drafting, implementing and evaluating cross-functional decisions that will enable an organization to achieve its long-term objectives. It is the process of specifying the organization's mission, vision and objectives, developing policies and plans, often in terms of projects and programs,. The implementation of a company's business model into organisational structures (e.g. organigrams, workflows, human resources) and systems (e.g. information technology architecture, production lines) is part of a company's business operations Business operations are those ongoing recurring activities involved in the running of a business for the purpose of producing value for the stakeholders. They are contrasted with project management, and consist of business processes.

It is important to understand that business modeling Business process modeling in systems engineering and software engineering is the activity of representing processes of an enterprise, so that the current process may be analyzed and improved. BPM is typically performed by business analysts and managers who are seeking to improve process efficiency and quality. The process improvements identified commonly refers to business process design at the operational level, whereas business models and business model design refer to defining the business logic of a company at the strategic level.

The brand is a consequence of and has a symbiotic relationship with the business model since the business model determines the brand promise and the brand equity becomes a feature of the model. Managing this is a task of integrated marketing.

See also

• Business model design
• Business plan
• Business process modeling
• Business reference model
• Business rule
• Competitive advantage
• Core competency
• Growth Platforms
• Market forms
• Marketing
• Marketing plan
• Strategic management
• Strategic planning
• Strategy dynamics
• Value migration

Further reading

• "Special Issue on Business Models" Long Range Planning, vol 43 april 2010, that includes 19 pieces by leading scholars on the nature of business models
• The Role of the Business Model in capturing value from Innovation: Evidence from XEROX Corporation’s Technology Spinoff Companies., H. Chesbrough and R. S. Rosenbloom , Boston, Massachusetts, Harvard Business School, 2002.
• Leading the revolution., G. Hamel, Boston, Harvard Business School Press, 2000.
• Changing Business Models: Surveying the Landscape, J. Linder and S. Cantrell, Accenture Institute for Strategic Change, 2000.
• Developing Business Models for eBusiness., O. Peterovic and C. Kittl et al., International Conference on Electronic Commerce 2001, 2001.
• Place to space: Migrating to eBusiness Models., P. Weill and M. R. Vitale, Boston,Harvard Business School Press, 2001.
• Value-based Requirements Engineering - Exploring Innovative e-Commerce Ideas, J. Gordijn, Amsterdam, Vrije Universiteit, 2002.
• Internet Business Models and Strategies, A. Afuah and C. Tucci, Boston, McGraw Hill, 2003.
• Focus Theme Articles: Business Models for Content Delivery: An Empirical Analysis of the Newspaper and Magazine Industry, Marc Fetscherin and Gerhard Knolmayer, International Journal on Media Management, Volume 6, Issue 1 & 2 September 2004 , pages 4 – 11, September 2004.
• Business Model Generation, A. Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self published, 2009

References

1. ^ ^{a b c} Business Model Generation, A. Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self published, 2010
2. ^ ^{a b} The Business Model Ontology - A Proposition In A Design Science Approach
3. ^ Do Some Business Models Perform Better than Others?, Malone et al., May 2006

Internet Business Models

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