Albert S Humphrey (1926-2005) who during his work at the Stanford Research Institute developed SOFT analysis that was later developed into SWOT analysis, also outlined an early version of the business model concept in 1968. For a business to be successful, Humphrey defined six inter-related areas which had to be developed simultaneously:
- Products & Services - What are they, how do they work, and when and how should they be improved
- Process - How the products and services are to be made and/or assembled, including subcontracting and purchasing labor and machinery
- Customer - Who will buy the products and services and how will customers be persuaded to buy them
- Distribution - How the product and services be warehoused, transported and delivered
- Finance - Where will the money come from and how will the cash flow be controlled
- Administration - How the organization will be managed, the management style, the organization structure and the people skill required
This was part of TAM (Team Action Management), a step by step method for improving company performance. The inter-related areas above are almost identical to modern definitions and elements of the business model concept. To read more about TAM see this article.
Hi Anders, thanks for pointing out that the concept of describing a business is quite old. Actually, I haven't heard of Humphrey's model even I did quite a lot of research on the origins of the term in 1999 when I wrote my Ph.D. thesis about business models and the internet.
ReplyDeleteThe term business model was most often used by IT specialist when they were building IT systems to support the business. To do so, they needed a model of the business and that was the reason why the term became so popular in the heydays of the new economy.
A great step in development of the business model was the work of Kim and Mauborgne who introduced the concept of the value innovation. Inspired by them, I used the value proposition, the value architecture and the revenue model as the core building blocks of any business. The value proposition is just the answer to Peter Drucker's question: What is the purpose of your business? In the three building blocks you can integrate the components Humphrey uses.
But there is a hug difference if you describe a business model just with Humphrey's components or you add the value proposition to the business model. The value proposition is what makes the business model concept so strong. You can have very similar products and services but a very different value proposition. It is the value proposition where the difference is being made not with your offering. It is interesting to see Alex's changing definition of the business model. At the beginning he did not have the value proposition but added it later.
Thank you for the great comment Patrick!
ReplyDeleteI totally agree with your conclusions about the value proposition. Ulf Petrusson, author of the rather complex book Intellectual Property & Entrepreneurship: Creating Wealth in an Intellectual Value Chain, uses three terms in relation to value creation: Value vision, value proposition and value experience, that I find captures what an organization wants to do, what it does and what people are experiencing.