Monday, December 1, 2008

What is a business model?

The term business model has many definitions and several academics compete for their definition to be the dominant one, but so far there is no widely accepted definition of the term. The term began to be used more frequently in the literature during the late Nineties.

Basically a business model is a framework for creating economic, social, or other forms of value. This can be understood in a broad or narrow sense and can be expressed, visualized and explained in many different ways. In the most abstract level, a business model is a number of elements and relationships between the different elements, and in the more detailed versions it often involves descriptions of the components presented below.

Common components in most business model definitions
  • Core capabilities (assets, capabilities, processes)
  • Customer value propositions (products and services, offering, differentiation)
  • Target customer (segments, scope, needs)
  • Revenue model (pricing, ways of charging)
  • Distribution channel (delivery, channels, promotion)
  • Partnerships (suppliers, partners, value chain position)
  • Cost structure (fixed and variable costs)
For me a business model answers the two questions:
  • How are values created, captured and by whom?
  • How are values extracted, controlled and by whom?
To relate this to the list above, I would expand the term value proposition to include all value offered to all stakeholders. I would also include the control mechanisms used to protect the created values and the profit streams from being reduced by partners, competitors or strong customers. Finally I would include the objects for transactions to clarify what is being transacted between different stakeholders, as it is no longer limited to products and services.

Some publications on definitions and components
To read more about business model definitions see the following publications:
Afuah, A. and C. Tucci (2001). Internet Business Models and Strategies
Alt, R. and H. Zimmermann (2001). Introduction to Special Section – Business Models.
Applegate, L. M. (2001). E-business Models: Making sense of the Internet business landscape
Chesbrough, H. and R. S. Rosenbloom (2000). The Role of the Business Model in capturing value from Innovation: Evidence from XEROX Corporation’s Technology Spinoff Companies
Gordijn, J. & Akkermans, J.M. (2000). Business Modeling is not Process Modeling
Hamel, G. (2000). Leading the revolution
Hawkins, R. (2001). The Business Model as a Research Problem in Electronic Commerce
Linder, J. and S. Cantrell (2000). Changing Business Models: Surveying the Landscape,
Magretta, J. (2002). Why Business Models Matter.
Osterwalder, A. (2004). The Business Model Ontology - A Proposition In A Design Science Approach
Rappa, M. (2001). Managing the digital enterprise - Business models on the Web
Petrovic, O., Kittl, C., and Teksten, R.D. (2001). Developing Business Models for eBusiness
Timmers, P. (1998). Business Models for Electronic Markets
Weill, P. and M. R. Vitale (2001). Place to space: Migrating to eBusiness Models


  1. I chanced upon to view your blog and found it very interesting as well as very informative, i was need such type information, which you have submitted. I really thankful to you, this posting help a huge number of people. Great ... Keep it up!

  2. Thanks for this list of sources, Anders! I'd add Henry Chesbrough's book, Open Business Models; Alex Osterwalder's book Business Model Generation, and Mark Johnson's Seizing the White Space (coming Feb 2010)

  3. Thanks for your comment and suggestions Andrea! You find a review of Alex's book on the blog and I just posted a review/summary of Getting to Plan B.