Wheneverabusinessenterpriseisestablished,iteitherexplicitlyorimplicitlyemploysaparticularbusinessmodelthatdescribesthedesignorarchitectureofthevaluecreation,IntroductionDevelopmentsintheglobaleconomyhavechangedthetraditionalbalancebetweencustomerandcanfindexpression,-centric,-eval-uatethevaluepropositionstheypresenttocustomerseinmanysectors,,-developedbusinessmodel,,,andtheestablishmentofreasonablyopenglobaltradingregimes,meanthatcustomershavemorechoices,variegatedcustomerneedsdelivery,-finingthemannerbywhichtheenterprisedeliversvaluetocustomers,enticescustomerstopayforvalue,’shypothesisaboutwhatcustomerswant,howtheywantit,andhowtheenterprisecanorganizetobestmeetthoseneeds,getpaidfordoingso,,innovationmanagement,andeconomictheory. (2010)172e194 :
,costs,,andlieatthecoreofthefundamentalquestionaskedbybusinessstrategistsehowdoesonebuildasustainablecompetitiveadvantageandturnasupernormalprofit?Inshort,abusinessmodeldefineshowtheenterprise1createsanddeliversvaluetocustomers,,businesspioneersneedtoexcelnotonlyatproductinnovationbutalsoatbusi-nessmodeldesign,:adifferentiated(andhardtoimitate),abusinessmodel[is]aconceptual,ratherthanfinancial,,abusinessmodelembodiesnothinglessthantheorganizationalandfinancial‘archi-2tecture’,,clearly,thenotionrefersinthefirstinstancetoaconceptual,ratherthanafinancial,,thebehaviorofrevenuesandcosts,,vol432010173
changingnatureofuserneeds,-quiredtoearnaprofit(ifoneisavailabletobeearned)and,onceadopted,definesthewaytheen-terprise‘goestomarket’.Butitisnotquitethesameasastrategy:,,thegrowthoftheInternetande-commerce,theoutsourcingandoffshoringofmanybusinessactivities,,thewayinwhichcompaniesmakemoneynowadaysisdifferentfromtheindustrialera,,,whichhasraisedanew,andinatransparentway,fundamentalquestionsabouthowbusinessesdelivervaluetothecustomer,,,suchastherecordingindustry,Internetenableddigitaldownloadscompetewithestablishedchannels(suchasphysicalproductsales)and,partlybecauseoftheubiq-uityofillegaldigitaldownloading,;itisalsoanewchannelofdistributionandforpiracywhichclearlymakescapturingvaluefromInternettransactionsandflowsdifficultforrecordingcompanies,,theInternetiscausingmany‘bricksandmortar’-cordingandnews,-deed,,manynewcompanieswithzeroornegativeprofits(andunprecedentedlylowrevenues)soughtfinancialcapitalfromthepublicmarkets,(eventually)figureout(highly),causingonecommentatorto3remarkthat‘thedemiseofapopularbutunsustainablebusinessmodelnowseemsinevitable’.Nomatterwhatthesector,-lingtocustomers,achievesadvantageouscostandriskstructures,andenablessignificantvaluecap-turebythebusinessthatgeneratesanddeliversproductsandservices.‘Designing’abusinesscorrectly,andfiguringout,-priseisfirstcreated;,excellentpeople,,,BusinessStrategyandInnovation
:inventionsareoftenassumedtocreatevaluenaturallyand,enjoyingprotectionofiron-cladpatents,firmscancapturevaluebysimplysellingoutputinestablishedmarkets,,‘publicgoods’and‘freerider’issuestooneside,businessmodelsarequitesimplyredundantbecauseproducers/,figuringoutbusinessmodelsforaneworexistingproductorbusinessisanunnecessarystepintextbookeconomics,whereitisnotuncommontoworkwiththeoreticalconstructswhichassumefullydevelopedspotandforwardmarkets,strongpropertyrights,thecostlesstransferof4information,perfectarbitrage,,thereissimplynoneedtoworryaboutthevaluepropositiontothecustomer,orthearchitectureofrevenues5andcosts,;producerswillsupplyifpriceisatoraboveallcostsincludingareturntocapitalethepricesystemresolveseverythingandbusinessdesignissuessimplydon’,with(one-sided),two-sidedmarketsarecommon,andcustomersdon’tjustwantproducts;,marketsmaynotevenexist,,intherealworld,’tjustwantproducts;’salsotruethatbusinessmodelshavenoplacewithinthetheoreticalconstructsofplannedeconomies(justasinaperfectlycompetitiveeconomy).Whilecentralplannersdoneedtounder-standthestagesintheproductionsystem,inasupplydrivensystemewhereconsumersmerelygetwhatthesystemproducesebusinessmodelssimplyaren’-atedwithproducerscapturingvaluebecausevaluedoesn’tevenhavetobecaptured;thestatede-cideswhatandhowtoproduce,,theylikewiselackanacceptableplaceinorganizationalandstrategicstudies,,,forinstance,recognizesLongRangePlanning,vol432010175Quitesimplythereisnoestablishedplaceineconomictheoryforbusinessmodels;andthereisnotasinglescientificpaperinthemainstreameconomicsjournalsthatanalysesordiscussesbusinessmodelsinthesensetheyaredefinedhere.(Possibleexceptionsaretheliteratureoninvestmentinbasicresearch,whicheconomistsrecognizeasbeingunsupportedbyprivatebusinessmodels(seebelow),andtheliteratureonbundling,inasmuchasitdealseindirectlyewithdifferentrev-enuemodels.):intangiblesare,atbest,,theproblemofcap-
that‘the1840smarkedthebeginningofagreatwaveoforganizationalchangethathasbroughtusthe6moderncorporation’.Asdiscussedearlier,neworganizationalformscanbeacomponentofabusi-7nessmodel;,thestudyofbusinessfreetotheInternationalStandardsOrganization(ISO).-Landfor$530millionin1969,McLeanreceived9$,wherethefoundersurmisedthatmostcustomerswanteddirectflights,lowcosts,reliabilityandgood176BusinessModels,BusinessStrategyandInnovationmodelsisaninterdisciplinarytopicwhichhasbeenneglectededespitetheirobviousimportance,,trans-actioncosts,andheterogeneityamongstconsumersandproducers,,asindicatedearlier,:,adjustingand/,-pany’s‘reengineering’,cattlewereshippedlivebyrailfromtheMidwesternstockyardcenterslikeOmaha,,greateconomiesin‘production’/centralizationandtransporta-tioncouldbeachieved,’snewbusinessmodelquicklydisplacedbusinessmodelsinvolvinganetworkofshippers,-housestostorethebeefnearpointofsale,,ofteninpartnershipswithlocaljobbers.‘OnceSwiftovercametheinitialconsumerresistancetomeatslaughtereddaysbeforeindistantplaces,hisproductsfoundaboomingmarketbecausetheywereasgoodasfreshlybutcheredmeatsandweresubstantiallycheapereSwift’ssuccessquicklyattractedimitatorseBythe1890s,menlikePhillip8ArmourhadfollowedonSwift’sheels’.,,wasconvincedthatconventionalshippingwashighlyinefficientbecauseshippingcom-paniestypicallybrokebulkatdockside,,renameditSea-LandIndustries(iteventuallybecameabsorbedintotheMaerskLine).Hedevel-opedsteelframestoholdthecontainers,firstonthetopdecksoftankers,andthenontheworld’sfirstspecializedcellularcontainership,theGatewayCity,-dardizationnecessarytodeveloptheindustry,McLeanmadeSea-Land’spatentsavailableroyalty
customerservice,butdidn’tneed‘frills’.Toachievethesegoals,Southwesteschewsthehub-and-spokemodelassociatedwithalliances,nordoesitallowinterliningofpassengersandbaggage,’-erator,ortospendlesstimeperformingandmoreintherecordingstudio,,,inthe80sand90s,themusicvideobecameanimportantsourceofrevenue,andmorerecently,‘soundtracks’,multiplerevenuestreamsareavailable,andtheparticularrevenuemodelem-ployedcandependonthemarketplace,onastar’scontextualtalentsandpreferences,,technologiesandlegalstructuresdictateand/,,thein-vestmentbankingfunctionusuallygeneratedmostofthebanks’,forGoldmanSachs(arguablytheindustryleader)thatfigurehadfallento16%by2007,whilerevenuesfromtradingandprincipalinvestmenthadgrownto68%,-jectedintothesystem,encouragedbyFreddieandFannie(andbyCongress),GoldmanSachsandMorganStanley(thelasttwoLongRangePlanning,vol432010177737,’’sExpresseEasyJethasimplementedasimilarmodelinEurope,‘razor-razorblademodel’isanotherclassic(andquitegeneric)caseofawellknownbusinessrevenuemodel(whichisjustonecomponentofabusinessmodel),whichinvolvespricingrazorsinexpensively,butaggressivelymarking-uptheconsumables(razorblades).Jetenginesforcom-mercialaircraftarepricedthesamewayemanufacturersknowthatenginesarelonglived,andmaintenanceandpartsiswhereRollsRoyce,GE,Pratt&(andservice)’razor-razorblademodel’isaclassicbusinessrevenuemodel...,sponsorshipisakeycomponentoftoday’,Adidas,Reebok,Canterbury,andotherssponsorfootballandrugbyclubsandteams,,thesecompaniesendeavortoleveragetheirbrandintooff-fieldproducts,,thismodelisreadilyimitated,anditsviabilityforanyparticularapparelcompanydependsonthesponsor’,teams,,movies,saleofphysicalCDsthroughstoresoronlinemusicsalesthrough10
-ganChase,thebankruptcyofLehmanBrothers,andMerrillLynch’sabsorptionbyBankofAmer-ica),GoldmanSachsandMorganStanleywillneedtomaintainlowerleverage,,bothhave(albeitreluctantly)madesignificantbusinessmodelchangeseinshort,
companiescanadoptbusinessmodels[]‘freemium’modelhasbeenadoptedbyAdobe(foritsPDFreader),SkypeandMySpace,whileOutshoutsInc()hasappliedFlickr’smultiplerevenuestreamsmodeltoon-lineWebvideos,‘cloud-based’computingmodels,forexample,removetheneedforsmallcompaniestoinvestup-frontinexpensiveserverseinsteadtheycanbuyservercapacityinsmallslices,asneeded,’sEC2,forexample,evenallowcustomerstobuyvirtualservercapacityforasingletransaction,‘fixedplusvariable’costmodelsintoentirelyvariablecostmodels,,strategyandsustainablecompetitiveadvantageAbusinessmodelarticulatesthelogic,thedata,andotherevidencethatsupportavaluepropositionforthecustomer,,it’saboutthebenefittheenterprisewilldelivertocustomers,howitwillorganizetodoso,(forthedeveloperorimplementorofthebusinessmodel)(nomatterhownovel)-mented,thegrosselementsofbusinessmodelsareoftenquitetransparentand(inprincipal)easytoimitateeindeed,,successfulbusinessmodelsveryoftenbecome,tosomedegree,‘shared’-ups,-enuestreamethesequelemoviestudioshavelongsoughtrevenuesfrom‘ancillary’licensing(toys,T-shirts,lunchboxes,backpacks),(suchasLinux,Firefox,andApache)(or‘kernel’)ofthesoftwareislicensedunderanopensourcelicenseandthenapremiumversionwithadditionalfeaturesand/‘vendors’getcustomers(often,andideallywiththeITorganizationbypassingProcurementDepartmentsaltogetherebecause,afterall,thesoftwareis‘free’)hookedonthefreeproduct,andthensubsequentlyconvertthemintopayingcustomersthroughthesaleofcom-plementarysoftwareand/,conversionratestopayingcustomershavebeenpoor,andit’,vol432010179
Asdescribed,,creatingavaluepropositionforeachseg-ment,settinguptheapparatustodeliverthatvalue,andthenfiguringoutvarious‘isolatingmech-anisms’thatcanbeusedtopreventthebusinessmodel/,itisunlikelytobeviable,,‘newspaperrevenuemodel’,useofadvertising(includingclassifieds)tohelpcoverthecostsofgeneratingcontenteiseasytoreplicate,andhasbeenimplementedwithlittlevariationinthousandsofgeographicallyseparate‘markets’(andhard-to-imitate)ebutatthesametimeeffectiveandefficientearchitectureforanenterprise’,-Marthavedemonstratedthevalueassociatedwiththeirbusinessmodels(whileWebvanandmanyotherdotcomsdemonstratedjusttheopposite).DellandWal-Mart’sbusinessmodelsweredifferent,superior,andrequiredsupportingprocessesthatwerehardforcompetitorstoreplicate(,newentrantscouldadoptkeyelementsofthemodelandpre-emptWal-Mart,asStevenTindallhasdemonstratedsoablyinNewZealandwith‘TheWarehouse’).,founderofDell,notes:Thisbeliefethatbyworkingdirectlywithcustomerswecouldgetthemtechnologyfaster,provideabetterlevelofservice,andprovidebettervalueewasthebasisofthebusinessethefundamentalbusinesssystemwasquitepowerfulanddeliveredlotsofvaluetoourcustomersewescreweduplotsofthings,buttheonethingwegotrightwasthiscorebusinessmodel,’scompetitorswereincumbentswhohaddifficultyinreplicatingitsstrategy,assellingdirecttocustomerswouldupsettheirexistingchannelpartnersandresellers:asanewentrant,’ssuccess,beyondthewayitorganizeditsvaluechain,,Delldeveloped(dynamic)capabilitiesarounddecidingwhichproductstobuildbesidedesktopandlaptopcom-puters,andhassinceaddedprinters,,(bigbox)retailinghadbeenaroundlongbeforeWal-MartfounderSamWalton(inhiswords)‘putgoodsizedstoresintolittleone-horsetowns15whicheverybodyelsewasignoring’.Onceinplace,thetownsWal-Marthadselectedweretoosmalltosupportanothersimilarsizedstore,-Martpromotednationalbrandsatdeepdiscounts,supportedbyinnovativeandleanpur-chasinglogisticsandITsystems:,includingLycos,Excite,AltaVista,InktomiandYahoo,wouldfindlotsofinformationeperhapstoomucheandpresentittousersinanunhelpfulmanner,,,oneofthefoundersofGoogle,180BusinessModels,BusinessStrategyandInnovation
surmisedthatcountinglinkstoawebsitewasawayofrankingitspopularity(muchlikehighercitationcountsinscientificjournalspointtomoreimportantcontributionstotheliterature),,,,(VisaandMasterCard,whoprovidenetworkservicesonlyanddon’tcompetewithbanksinissuingcreditcards)arenothobbledbysuchrelationshipconflicts,andareclearlylikelytobethebank’(andindeedhavenothad)muchsuccesstryingtoreplicatetheVisa/,innovatingwithbusinessmodelswillnot,byitself,,newbusinessmodels,orrefinementstoexistingones,likenewproductsthemselves,oftenresultinlowercostorincreasedvaluetotheconsumer;ifnoteasilyreplicatedbycompetitors,theycanprovideanopportunitytogeneratehigherreturnstothepioneer,,anewbusinessmodel,beingmoregeneralthanabusinessmethod,isveryunlikelytoqualifyforapatent,-tionsofabusinessmodelmayenjoycopyrightprotection,butthatisunlikelytobeabarriertoLongRangePlanning,:directedsearchbiasedtofavoradvertiserswasperceivedbyGoogle’,,PageandBrinfoundawaytoaccom-modateadvertising(therebyenablingrevenuegeneration)withoutsubtractingfromthesearchex-16perience,,theyalsoadoptedanintegratedapproach(byfulfillingtheirownsoftwareandhardwarerequirements)tokeepcontroloftheirproduct/serviceoffering,,PageandhiscolleaguesatGoogledevisedanInternetsiterankingsystemethePageRankalgorithmewhichwentontobetheircoreproduct/serviceoffering,,’sproduct/(remark-ably)
‘idea’.Whatthenisit,ifanything,thatislikelytoimpedethecopycatbehaviorthatcansoquicklyerodethebusinessmodelpioneer’sadvantage?,implementingabusinessmodelmayrequiresystems,,whileatsomelevelDellComputer’sdirect-to-user(consumersandbusinesses)businessmodelisobvious(yousimplydisintermediatewholesalersandretailers),whenGatewayComputerstriedtoimplementedasimilarmodel,theirfailuretoachieveanywherenearDell’,whenNetflixpioneereddeliveryofDVDsbymailusingasubscriptionsystem,,bothbecauseitwasnothandicappedbyBlockbuster’scannibalizationconcerns,andbecauseithadpat-entsonthe‘orderedlist’(whichitlateraccusedBlockbusterofinfringing),theremaybealevelofopacity(Rumelthasreferredtothisopacityas‘uncertainimita-bility’)thatmakesitdifficultforoutsiderstounderstandinsufficientdetailhowabusinessmodelis18implemented,,evenifitistransparentlyobvioushowtoreplicateapioneer’sbusinessmodel,,,competitionislikelytobevigorousbecauseothernewentrants,similarlyunconstrainedbyincumbencyandcannibalizationanxieties,’’scompetitiveinroadsintoitsDVDstore-rentalmodel,BlockbusterpurchasedassetsfromNetLearninApril2002,,182BusinessModels,BusinessStrategyandInnovation
asubscriber-basedonlineDVDrentalservice,,BlockbustershutdownFilmCaddyandlaunchedBlockbusterOnline,itsnewonlinerentalservicethatallowedcustomerstorentunlimiteditsretailstorefootprintewhichNetflixcouldn’’sstoresalsocomple-menteditsonlinestrategy,’sofferingdirectly,itdidhavesomelimitedpatentprotection,withtwopatentsthatprovideditsbusinessmodelsomeprotectioneinparticular,toits‘orderedlist’,theydidcovermethodsallowinguserstopayaflatfeetohaveamaximumnumberofmoviesoutatanyonetime,,BlockbusterimplementedaclosefacsimileoftheNetflixbusinessmodel(evenitsweb-sitewasverysimilar,featuringstars,recommendations,boxshotsandthe‘dynamicqueue’)andachievedreasonablesuccess,undoubtedlybluntingNetflix’,Netflix’spioneeringstatusanditscapacitytoimproveitsbusinessmodel,andenforceitspatents,’gotomarket’and’capturingvalue’,‘gotomarket’and‘capturingvalue’’searlierworkon‘ProfitingfromInnovation’,whichoutlinedacontin-gentapproachwithrespecttohowtoorganizetheproductionsystem/valuechain,takingintoac-countthe‘appropriabilityregime’andtheinnovator’,vol432010183DVDs(threeatatime)-ingfees,,itlaunchedBlockbusterTotalAccess,,mostelementsoftheNetflixbusinessmodelwererelativelyeasytocopy,and,althoughBlockbusterwasundoubtedlyconstrainedbythecannibalizationofitsin-storerentalsbyitsonlinebusiness,thesemovesreflecteditsattemptstorespond(defensively):atminimum,-tomersallthefunctionalityofNetflixplusseveraldistinguishingfeatureseassociatedwithusing
likelytoleadtothe(self-)destructionofcreativeenterprisesasitistoprofitable(Schumpeterian)creativedestruction,,,coupledwithcarefulstra-tegicanalysis,arenecessaryfortechnologicalinnovationtosucceedcommercially:otherwise,-logicalinnovationbutfailedtogetthebusinessmodelandthetechnologystrategyrightincluded20EMI(theCATscanner)andXerox(thepersonalcomputer).’+patentsandpersonalfamefrominventingadurableelectriclightbulb,electricityasasystem,,heabandonedtherecordingbusinessafterarguablyfailingtogetitsbusinessmodelrightbyinsistingthatEdisondisksbedesignedtoworkonlyonEdisonphonographs(althoughhisearlyphonographalsosufferedfrompoorsoundreproduction,recordingsthatweretoobrief,andcylindersthatcouldonlysurviveafewplayings).Inshort,:-21herentlydifficult, Atoneendofthescalestandstheintegratedbusinessmodel,inwhichaninnovatingfirmbun-dlesinnovationandproducttogether,andassumestheresponsibilityfortheentirevaluechainfromAtoZincludingdesign,manufacturing,,companiesthathavetherightassetsalreadyinplacearewellequippedtodothis;buttheframeworkalsoindicateswhentheinternaldevelopmentandcommercializationstrategyisanecessity. Theotherextremecaseistheoutsourced(purelicensing)businessapproach,onethathasbeenembracedbyanumberofcompanies,likeRambus(semiconductormemory)andDolby(highfidelitynoisereductiontechnology).Withrespecttolicensingversusinternalcommercialisationbytheinnovator,theframeworkyieldsanswerscalibratedaccordingtothestrengthoftheap-propriability/:withoutthemthelicenseemightwellbetheonewhocapturesvalue,attheexpenseoftheinnovator. Inbetweentherearehybridapproachesinvolvingamixtureofthetwoapproaches(-sourcemanufacturing;providecompanyownedsalesandsupport).Hybridapproachesarethemostcommon,buttheyalsorequirestrongselectionandorchestrationskillsonthepart23ofmanagement.[a]licensingmodel[willonly]work[with]strongintellectualpropertyrights.[otherwise]thelicenseewillcapturevalue,,BusinessStrategyandInnovation
TheProfitingfromInnovationframeworkcanthusbeconsideredasatooltohelpdesignbusi-nessmodels,andusingitallowsonetomapbusinessmodelselectiontotypeofinnovation,whilesimultaneouslyenablingonetofigureoutwhereintellectualpropertymonetizationthroughlicens-24ingislikelytobeviable,andwhereit’snot,,(byconstruction)itissilentonmanyissuessuchasmarketsegmentationandthechoiceofproductfeatures,.‘Public’(andreasonablywellunderstood)-entificpublications,,itisverydifficulttochargefordiscoveries,eveniftheyhavethepotentialtogeneratehighvalueforsociety,-overs(externalities)aresimplytoolarge;-profitbusinessmodelforcapturingvaluefromscientificdiscoveriesinaworldwheresci-encewantstobeopenandrapiddisseminationofscientificknowledgethroughjournals,confer-encesandprofessionalcontactsisalmostinevitable:notsurprisingly,mostbasicresearchisnotfundedbybusinessfirms,‘publicgoods’;acircum-stanceinwhichtheeconomicactivityinquestiongeneratespositiveexternalitiesor‘spill-overs’.Asthereisnogood(private)businessmodelthatcansupportvaluecapture,governmentfundingand/,theconceptofthe‘businessmodel’‘failures’occurinthecontextofinnovationwhenprivatebusinessmodelsforcapturingvaluedrawforthinsufficientinvestmentinR&,themostcommonbusinessmodeltocapturevaluefromin-ventionsistoembedtheminaproduct,&Dtoameliorate(tosomedegree),digitalcameraorautomobiledoesn’tcomewithapricefortheproductandanunbundledpriceforknowhowand/orintellectualprop-erty:invention/technologyandproductaretypicallybundledtogether,although(intheory)theydon’(withrespecttoR&Dinvestment)arepartlyafunctionoftheability(orlackthereof),onewaytotryandgetaroundmarketfailuresinthe‘marketforinventions’istobundleinvention(s),firms(andinparticularsmallstart-ups)under-employtheavailablemechanisms,justofferingcus-tomers‘items’,thismaynotrepresentacustomersolution;abusinessmodelbasedonsimplysellinganinventioneorevenaninnovativecomponentor‘item’emaynotenabletheinnovatortocaptureasignificantshareofthevaluethatmightbegeneratedbytheirinnovativetechnology,‘marketing’-taryproductsandservicesisoftennecessary,notjusttohelpcapturevalue,(knowhow)as-sets,pricingandvaluecapturearedifficultbecauseofthenonexistenceofperfectpropertyrights,26whichmeansthatmarketscan’tworkwell,,vol432010185
illustratedabove,manyInternetservicesaresimplyprovidedfor‘free’asawaytobuildbrandandtoindirectlypromotearelatedvalueaddedservice,,whileacommonaquestionabletrackrecordintermsofbusinessmodelinnovation,abandoningtherecordingbusinessandalsofailingtogetdirect(ratherthanalternating),unlesstheycanoffercompellingvalueprop-ositionstoconsumers/usersandsetup(profitable)businesssystemstosatisfythemwiththerequisitequalityatacceptablepricepoints,theinnovatorwillfail,eveniftheinnovationitselfisremarkable,,thismakesmanagement,(indesigningbusinessmodels),,smallimprovementsinthemanufacturingprocess(evenifcumulativelylarge)willusuallynotrequirebusinessmodelinnovation,,andthemorechallengingtherevenuearchitecture,,asindicatedbysomeoftheearlierexamples,’tbringanyimprovementstothetechnologyofthePersonalComputerebutitdidcombinebothsuppliers’anditsownorganizational/distributionsysteminnovationstodelivercompellingvaluetoend186BusinessModels,BusinessStrategyandInnovationandhelpfulapproach,isn’,:thetraditionalrevenuemodelusedbyinnovatorstocapturevaluefromtechnol-ogyinvolvestheconsumerbuying(andpayingfor),particularlyifanattractivebundledsolutioncanbeoffered,ifthereisstrongintellectualprop-erty,,andrequirebusinessmodelsthatfeaturepublicfunding,[but]withoutittheremaybenorewardforpioneeringindividuals,;,thecreationofneworga-nizationalforms(liketheSkunkWorksandthemultidivisionalorganizationalstructure),organizationalmethods(likethemovingassemblyline),andinparticularnewbusinessmodelsareofequaleifnotgreatereimportancetosociety,-outittechnologicalinnovationmaybebereftofrewardforpioneeringindividuals,(ornation),evenaninventorascelebratedasThomasEdisonhad
users:ashaveSouthwestAirlines,Virgin,VirginBlue,,insight,andagooddealofcustomer,-trepreneurmaybeabletointuitanewmodelbutnotbeabletorationalizeandarticulateitfully;,theevolvingrealityim-pactingcustomers,society,,andlearningandadjustmentswillbenecessary:newbusinessmodelsrepresentprovisionalsolutionstouser/customerneedsproposedbyrepresententrepreneurs/,:entrepreneurs/managerswhoarewellpositioned,whohaveagoodbutnot30perfectbusinessmodeltemplatebutwhocanlearnandadjust,
identifyasyetunarticulatedneedsand/;laterthenewspaper;;,whentheunderlyingtechnologychanges,,,‘deeptruth’aboutthefundamentalneedsofconsumersandhowcompetitorsareorarenotsatis-fyingthoseneeds,andofthetechnologicalandorganizationalpossibilities(andtrajectories)forim-provementesomeofthem,though,,however,‘deeptruths’andcanfigureoutwhatcustomerswantanddesignabetterwaytosatisfythem(andbuildsustainableorganizationstoaddressthesecustomerneeds),buttheymustunderstandcustomerneeds,technologicalpossibilities,,abusinessmodelarticulatestheunderlyingbusinessor‘industriallogic’ofafirm’,itislikelythatthelogicwillhavetobetestedandretested,(discussedabove),.,offersaflat-feeDVDmovierentalservicethat,by2007,wasservingover6millionsubscribersfromitscollectionof3275,’sbrowsefunctiontosearchformoviesbygenre,anduseanextensivemovierecommendationsystembasedonotherusers’,theNetflixbusinessmodelwasbasedonapay-per-rentalservice,butthisinitialpricingmodeldidnotsucceed,,betweenSeptemberandOctober1999,itreinventeditselfwithasubscriptionmodel(the‘MarqueProgram’).Itendeditspay-per-rentalmodelentirely,andevolvedthemonthlyfeeprogramtoallowsubscriberstorentanynumberofDVDspermonth(althoughonlyalimitednumberatanyonetime).Themodelwassupportedbyasystemofregionaldistributioncenterswhichensurednextdaydeliverytoover90%,ittookawhiletobeabletoascertaintherightpricepointsandthemannerofpricingthatwasmostacceptabletothecustomerbaseforitsnewservice;butasNetflixmanage-mentfiguredoutviewerconvenience,wantsandwillingnesstopay,:by2006ithadreachedalmost$‘architecture’andpricingmodelforabusinessrequiresnotjustunderstandingthechoicesavailable,butalsoassemblingtheevidenceneededtovalidateconjecturesandhunchesaboutcosts,customers,competitors,complementors,distributorsandsupplierstakesdetailedfact-specificinquiry,andakeenunderstandingofcustomerneedsandcustomerwillingnesstopay,,,
,andtheanswersarelikelytobeambiguous,,businessmarketentrystrategyewhileentrytimingisastrategic,ratherthanabusinessmodelissue,itmaydependinpartonthebusinessmodelemployed,,butsuccessratescanbeimprovedifthearchitectsofthebusinessmodellearnquickly,,onceabusinessmodelissuccessfullyestablished,,-ple,asthevaluepropositionassociatedwiththetraditionalpersonalcomputersoftwarelicensingLongRangePlanning,vol432010189propositionsthatarenomorethangoodideasfallshort;likewisepropositionsthatinvolvecaptur-ing1%ofhugemarketsshowalackofunderstandingofdifferencesamongst(potential)customers,(gimmicky):,andagainsthowitmightevolveAprovisionalbusinessmodelmustbeevaluatedagainstthecurrentstateofthebusinessecosys-tem,(whicharesummarizedinFigure3)include: Howdoestheproductorservicebringutilitytotheconsumer?Howisitlikelytobeused?In-asmuchasinnovationrequirestheprovisionofcomplements,arethenecessarycomplementsal-readyavailabletotheconsumerwiththeconvenienceandpricethatisdesirable(orpossible)?; Whatisthe‘deeptruth’aboutwhatcustomersreallyvalueandhowwillthefirm’sservice/prod-uctofferingsatisfythoseneeds?Whatmightthecustomer‘pay’forreceivingthisvalue?; Howlargeisthemarket?Istheproduct/servicehonedtosupportamassmarket?; Aretherealternativeofferingsalreadyinthemarket?Howistheofferingsuperiortothem?; Whereistheindustryinitsevolution?Hasa‘dominantdesign’emerged?Strategicrequirements33arelikelytobedifferentinthepre-andpost-paradigmaticperiods; Whatarethe(contractual)structuresneededtocombinetheactivitiesthatmustbeperformedtodelivervaluetotheconsumer?Bothlateralandverticalintegrationandoutsourcingissuesneedtobeconsidered.(Contracttheory/); Whatwillitcosttoprovidetheproduct/service?Howwillthosecostsbehaveasvolumeandotherfactorschange?;and Whatisthenatureoftheappropriabilityregime?Howcanimitatorsbeheldatbay,andhowshouldvaluebedelivered,priced,andappropriated?Astheauthorhasnotedinpreviouswork,beyondspecifyingarealisticrevenuearchitecture,de-signingabusinessmodelalsoinvolvesdeterminingthesetoflateral(complementary)andverticalactivitiesthatmustbeperformedandassessingwhetherandhowtheycanbeperformedsufficientlycheaplytoenableaprofittobeearned,
(provisional)businessmodelmodel(wherebyperiodicupdateswouldrequirethepurchaseofnewsoftwarelicensesandaddi-tionalmaintenancecosts)hasweakenedforsomecustomers,,Microsoftis‘overhaulingnotonlywhatitmakesbuthowtodeliverandchargeforit’.MicrosofthasapparentlybeguntoofferitsExchangeemailserverprogramforamonthlyfee,aswellasa‘barebones’versionofOfficeforfree,supportedinpartbyonlineadvertising(infact,itappearsnowtobeofferingsomeproductsunderthe‘freemium’philosophydescribedearlier).‘art’..,designinggoodbusinessmodelsisinpartan‘art’.Thechancesofgooddesignaregreaterifentrepreneursandmanagershaveadeepunderstandingofuserneeds,considermultiplealterna-tives,analyzethevaluechainthoroughlysoastounderstandjusthowtodeliverwhatthecustomerwantsinacost-effectiveandtimelyfashion,adoptaneutralityorrelativeefficiencyperspectivetooutsourcingdecisions,,alongwithelementsoftheProfitingfromInnovationframeworksuchastheinnovationcycle,appropriabilityregimes,
,andthereisalmostnochanceofbusinesssuccessegetitright,andcustomizeitforamarketsegmentandbuildinnon-imitabledimensions,anditwillcontributetothefirm’:’s‘ProfitingfromInnovation’paperdiscusses,especiallyinthepre-paradigmaticindustryevolutionphase,itisnec-essarytostayflexible,experimentwiththeproductandthebusinessmodelandlearn,bothfromone’sownandone’scompetitors’activities,andtokeepsufficientfinancialresourcesonhandtoremainanindustryparticipanteandhopefullythemarketleaderebythetimethe‘dominantde-sign’,onehopestobethepromoter/,-scribesthedesignorarchitectureofthevaluecreation,,definesthemannerbywhichthebusinessenterpriserespondstoanddeliversvaluetocustomers,enticescustomerstopayforvalue,,abusinessmodelreflectsmanagement’shypothesisaboutwhatcustomerswant,howtheywantitandwhattheywillpay,andhowanenterprisecanorganizetobestmeetcustomerneeds,,,:firmscanselectabusinessenvironmentorbeselectedbyit:theycanalsoshapeitZottandAmitbravelyendeavortohypothesizeastotheappropriatemappingofbusinessmodels37totwoproductmarketchoices:,()testablepropositionshavebeenadvanced(includingbythecurrentauthor),,,inparticular,areoftenforcedtomakeonlyeducatedguessesastowhatcustomerswant,whattheywillpayfor,Magrettaclaimsthatbusinessmodelsare‘variationsonthegenericvaluechainunderlyingallbusi-nesses’.(asthecurrentauthorhasnoted)
Onekeyconclusionoftheanalysisisthat,tobeasourceofcompetitiveadvantage,-imitableincertainrespects,eithercomplicatedprocessstepsorstrongintellectualpropertyprotection,(boththeoreticalandpractical)onthetopicisremarkable,giventheimportanceofbusinessdesign,,-FullerandIanMacMillanfortheirinvitationtocontributetothisSpecialIssue,andMichaelAkemann,SebastienBelanger,JohnBlair,HankChesbrough,MichaelKatz,DougKidder,DavidMitchell,CharlesO’Reilly,RichardRumelt,AlexanderStern,(related),Valuecreationine-business,StrategicManagementJournal22,493e520(2001);,Thefit192BusinessModels,,businessmodelsarefrequentlymentionedbutrarelyanalyzed:therefore,,itiscommontoseegreattechnologicalachievementsfailcommerciallybecauselittle,ifany,,competition,innovation,,togetherwiththeroleofentrepre-neursandmanagersintheeconomyandinsociety,shouldalsobenefitfromabetterappreciationofbusinessmodelsandtheirroleinentrepreneurship,,suppliers,,abusinessmodelmustbemorethanjustagoodlogicalwayofdoingbusiness..Itmustbewoulddisturbrelationshipswithexistingcustomers,suppliers,,orbybeingunpalatableforcompetitorstoreplicatebecauseit
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