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Branding Laws · Internet Marketing · eMarketing · Internet Advertising · Online Branding |
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Branding Laws · Internet Marketing · eMarketing · Internet Advertising · Online Branding |
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Developing Business Models for eBusiness
Otto Petrovic a , Christian Kittl b and Ryan D. Tekstenc
Developing Business Models for eBusiness
Otto Petrovic a , Christian Kittl b and Ryan D. Tekstenc
a evolaris eBusiness Competence Center
Hugo Wolf Gasse 8, A-8010 Graz, Austria
Tel. +43 316 351111 100, Fax. +43 316 351111 200, Email: otto.petrovic@evolaris.net
b evolaris eBusiness Competence Center
Hugo Wolf Gasse 8, A-8010 Graz, Austria
Tel. +43 316 351111 111, Fax. +43 316 351111 200, Email: christian.kittl@evolaris.net
c MALD Candidate at The Fletcher School of Law and Diplomacy, Tufts University
46 Orchard St, Apt 2, Medford, MA 02155
Tel. +1 (617)571-3087, Email: ryan.teksten@tufts.edu
Abstract
The paper introduces first insights into a methodology for
developing eBusiness business models, which was
elaborated at evolaris and is currently validated in various
business cases. This methodology relies upon a definition
of the term business model, which is first examined and
upon which prerequisites for such a methodology are
presented. A business model is based on a mental
representation of certain aspects of the real world that are
relevant for the business. Supporting this change of the
mental model is therefore a major prerequisite for a
methodology for developing business models. This paper
demonstrates that it addition, a business model discussion
should be theory based, able to handle complex systems,
provide a way for risk free experiments and be practically
applicable. In order to fulfill the above critieria, the
evolaris methodology is grounded on system theory and
combines aspects of system dynamics and action research.
Keywords:
Business Model; Business Logic; eBusiness; Mental
Model; System Theory; System Dynamics
Introduction
Within the last 3 years the discussions about business
models and the impact of the Internet on them have become
more topical. However, there is still no common
understanding of how a business model is defined.
Moreover, a widely accepted methodology of how to
develop or transform one is also absent. An important step
in this direction is the editorial in the special issues of the
Electronic Markets Journal on business models, where Alt
and Zimmermann [1] identified six generic elements
present in most definitions. Building upon this grid, our
paper tries to expand the scope towards a methodology for
developing business models and accounting for the impact
of the Internet and the dynamic evolution of a business.
Internet technology can be used to streamline processes and
reduce costs, but with even higher impact on the business in
order, it can be used to change the business model itself—in
effect, it changes the logic behind the processes. In many
cases, the entrepreneur or manager of an established
enterprise is not familiar with the potential integration and
utilization factors of the Internet in general, and thus he/she
will consult with experts. On the other hand, the
entrepreneur is the one who truly understands his business.
It is therefore crucial to combine this knowledge with that
of the consultants for a ‘change of mind’. A practical
methodology applicable to both parties is needed which
supports the adaptation of the manager’s mental models’,
which leads to the development of new business models.
What is a Business model?
Current approaches
Together with Alt and Zimmermann it can be said that
‘business models’ are perhaps the most discussed and least
understood terms and aspects of eBusiness, eCommerce
and eMarkets [1]. Despite an intuitive understanding that
seems to be widespread, a more thorough analysis reveals a
confusing and incomplete picture of the dimensions,
perspectives and core issues of these business models.
Linder and Cantrell [2] show that the term is often used
when really only one aspect of a business model is intended
to be conveyed: the pricing model (e.g. free model), the
revenue model (e.g. subscription or cable model), the
organizational form, and so on.
The probably best known definition is given by Timmers
Business
model
Business
processes
Information- and
Communication System
Increasing
impact on
business
performance
[3]: In his 1998 article he defines a business model in
respect to its architecture for the product, service and
information flows, the benefits for the various business
actors, and the sources of revenues. In addition, he
acknowledges the necessity for a marketing model in
regards to the process of building competitive advantage in
the networked economy. He therefore espouses a
“systematic approach to identifying architectures for
business models” via a value-chain deconstruction and reconstruction.
By examining the “possible architectures for
business models, which are then constructed by combining
interaction patterns with value chain integration,” Timmers
listed eleven possible models. These were reached by
combining a value chain deconstruction, and interaction
patterns linkage that resulted in a reconstruction process
based upon a network perspective of business models.
However, he does not necessarily evaluate the viability of
the resulting value chain models, but rather differentiates
these models by examining 1) the degree of innovation and
2) the functional integration.
Another well-known view on business models is presented
by Rappa [4] in the form of a comprehensive list of 29
different business models within nine categories. But, as
Rappa admits, his list is neither definitive nor exhaustive
and points out that there is no single, comprehensive and
cogent taxonomy yet available. What seems to be common
to all understandings of the term ‘business model’ includes
a description how a company makes money and can sustain
itself by providing more value to its clients than the
competitors.
So what is a business model anyway?
From our point of view it is necessary to ground the
definition on an established theory in order to make its
application resistant to constant challenges. We use system
dynamics for various reasons; one of which is the ability of
the methodology to deal with dynamically complex
systems. In contrast to combinatorial complexity, which
arises if the combinations one must consider in making a
decision are numerous, dynamic complexity can exist even
in simple systems with low combinatorial complexity and
stems from the interactions among the elements [5]. System
dynamics is based on system theory, which posits that a
company can be seen as a separate individual social system
bounded by the environment conditional on open
information exchange. The meaning of boundaries lies in
bounding in respect to sense. [6] Every event in the world
cannot be included in a limited system. Therefore, a system
is characterized by focused attention, energy and time to
those factors that render it distinct. Newer system theories
try to see systems always in relation to their relevant
environment and state that a system can be understood
neither from solely looking internally nor from seeing it as
only a black box. At this point, no comprehensive
introduction to concepts like autopoetic theory, clarified as
or self-reflection, which are important for system theory, is
given. Instead, it will be shown what the term business
model means in this context and how it is related to
processes or competition.
Above all, a business model is a model of a business. A
model, on the other hand, is only an artificial
representation of reality. It therefore has to detract focus
from certain aspects while concentrating on others; it is
impossible for all the variables that comprise reality to be
adequately and consistently represented, particularly if the
goal is to control for effect of certain factors over others. A
model can be descriptive or predictive, but in many cases
people would not rely on the outcomes of the model only,
when making a decision. This is because a model cannot
(and should not) be a complete and precise representation
of reality—even for very simple social systems. Even if it
could, people would not recognize it as such, because as
what is considered to be important for the model depends
on the position of the observer. But, as will be shown later,
the process of modelling social systems and the derived
model itself can be used for learning, especially if is done
with teams, rather than individuals.
A business model is not a description of a complex social
system itself with all its actors, relations and processes.
Rather, it describes the logic of a ‘business system’ for
creating value that lies behind the actual processes. Figure 1
illustrates the relationship between different tiers of
business logic: The business model gives sense to the
various business processes by describing why certain
processes are designed the way they are. The business
processes, on the other hand, have a dynamic relationship
with the underlying information and communication
system. This should not detract from the possibility that
changes be mistaken for that changes in the available
technology could not effect established processes or alter
the business model. Indeed, certain new business models
have just become viable through the potential deployment
of modern ICT. Changes on a higher level, which have
more impact on the business, always result in changes on
the underlying tiers as well and that a business model can
only be implemented successfully if the processes and the
supporting ICTs fit.
Figure 1 – Hierarchical structure of business logic
As mentioned above, the business model describes the core
logic of a business. This is equivalent to Linder and
Cantrell’s definition of an operating business model [2]:
“An operating business model is the organization's core
logic for creating value. The business model of a profitoriented
enterprise explains how it makes money. Since
organizations compete for customers and resources, a good
business model highlights the distinctive activities and
approaches that enable the firm to succeed-to attract
customers, employees, and investors, and to deliver
products and services profitably. Only the business model
components that are part of the essential logic are included,
so one company's operating model may look dramatically
different from another's.”
From our point of view a business model can be divided
into seven sub-models, which are a extension and
modification of Wirtz’s model [7]:
1. Value Model—Describes the logic of what core
product(s)/service(s)/experience(s) are delivered to the
customer and other value-added services derived from
the core competence.
2. Resource Model—Describes the logic of how elements
are necessary for the transformation process, and how
to identify and procure the required quantities.
3. Production Model—Describes the logic of how
elements are combined in the transformation process
from the source to the output.
4. Customer Relations Model—The logic of how to
reach, serve, and maintain customers. It consists of the
following sub-models:
• Distribution Model—The logic of behind the
delivery process.
• Marketing Model—The logic behind reaching and
maintaining customers.
• Service Model—The logic behind serving the
customer.
5. Revenue Model—Describes the logic of what, when
why, and how the company receives compensation in
return for the products.
6. Capital Model—Describes the logic of how financial
sourcing occurs to create a debt and equity structure,
and how that money is utilized with respect to assets
and liabilities, over time.
7. Market Model—Describes the logic of choosing a
relevant environment in which the business operates.
Figure 2 illustrates the entire business system. It shows an
enterprise system with its relevant environment and the
seven sub-models that constitute the business model. It
should be noted that the sub-models describe the logic
behind the corresponding processes; i.e., the production
model shows why a certain production process is chosen.
For example, the market model reveals why a business
operates in its specific relevant environment with the given
legal framework, technology, (potential) customers,
competitors, and resources.
Figure 2 - Elements of a Business Model
In their framework Alt and Zimmermann [1] have
identified six generic elements found implicitly or explicitly
in most current definitions of the term business model.
These elements are: mission (goals, vision and value
proposition), structure (actors and governance, focus),
processes (customer-orientation, co-ordination mechanism),
revenues (sources of revenues, business logic) and, as
complementary dimensions, legal issues and technology (as
both enabler and constraint). It can be seen that many of
these elements can also be found in our model in a slightly
different form. It is a useful framework for developing
business models and it should be clear that the respective
sub-models cannot be viewed independently of each other.
But still, the Alt and Zimmermann method does not provide
any guiding for how to develop a new business model or
how to change an existing one to adapt to the new
requirements of eBusiness. Subsequently, the prerequisites
for a methodology of developing business models for
eBusiness are presented as well as the one that has been
developed at evolaris in accordance with the criteria
introduced.
What is important for developing business models?
Every entrepreneur has an intuitive understanding of the
logic how his/her company creates value–the essence or
core competency of the company’s business model. This
logic influences important decisions, although in many
cases it is very difficult to clearly and simply communicate
their knowledge.. This logic of the system, the business
model, is based upon a complex mental model and that can
only be really changed if the mental representation of the
real world is altered first.. The mental model can be
described as a network of facts and concepts, and its
content and structure contain our understanding of social
and physical phenomena [8].
Figure 3 – Single- and double-loop learning
The thick arrows in Figure 3 show a modified version of the
single-loop learning presented by Sterman [5]. It depicts
that learning feedback from the real world operates in the
context of the existing business model, which in turn is
derived from our mental models. As long as there is no
change in this mental model, the business model cannot be
improved and information feedback only reinforces
decisions based on the existing one. The type of learning
that also feeds back to alter our mental model has been
denoted as double-loop learning [11] and is depicted with
dashed arrows in Figure 3 (where the additional arrows
from and to the element ‘methodology for developing
business models’ have been added to the well known
concept to show the effect this methodology has: it supports
the change of the mental model). Double-loop learning
replaces a reductionist, narrow, short-run and static view of
the world with a holistic, broad, long-term and dynamic
view. Building on this change of mind, business models
can be redesigned as well. In the real world and particularly
in the world of social action, these feedbacks do not work
well due to a preponderance for misperceptions,
unscientific reasoning, judgmental biases and defensive
routines that inhibit changes in the mental models as well as
reinforce the inability to infer dynamics from it. This
prevents the business model from being changed. Figure 3
shows that in this case only the processes and the ICS can
be modified. Hence, , when people want to improve their
business model for eBusiness they first need to talk about
reducing time and costs via automating or redesigning
processes. Really they want to improve their business
model for eBusiness: They first need to alter their mental
models. A methodology for supporting this whole process
is necessary. If this methodology doesn’t support the
change of mental models it will only be successful in
changing the ICS or at best the processes, but not the
business model. The business impact of ebusiness can then
only be realized partly. The further prerequisites for a
methodology for developing business models, as identified
by evolaris, are presented below:
First of all, the methodology should be able to handle
complex systems: As described above, a business can be
seen as a system. With all its elements and
interrelationships it is both combinatorially and
dynamically complex. The same is even truer for the mental
model.
This leads to the second prerequisite: The methodology
should support the structuring and sharing of
knowledge. In order to be able to effectively change
business models, which are based on the mental models, in
a team, learning has to occur in three (iterative and flexible)
stages [10]:
• Mapping mental models – explaining and
structuring assumptions (via systems models);
• Challenging mental models – revealing
inconsistencies in assumptions;
• Improving mental models – continually extending
and testing mental models.
The process of mapping mental models provides the means
for structuring and sharing knowledge. It is necessary to
communicate ideas within the company, with employees,
consultants and customers. This is an important
requirement for a methodology to develop business models.
Challenging mental models is the process of testing for
internal and external validity. Experienced managers
frequently have accurate perceptions of causal structures
and decision-making process but draw erroneous
conclusions about what occurs when different parts of a
system interact. Challenging models thus requires an
inference engine to deduce the consequences of interactions
among the elements of the map [10]. Simulation provides
that engine enables risk free experiments. In reality, of
course, it is not possible to try out all different strategies
that seem promising at a certain stage at once. The
management has to decide for one of them, which may lead
to a loss of profit or even bankruptcy if it is the wrong one.
Being able to predict the outcomes more accurately through
the support of risk free experiments thus is an important
prerequisite.
Challenging mental models is also delicate as manager’s
beliefs are called into question and reveal inconsistencies in
prior strategies. This is only possible if one succeeds in
creating an atmosphere for organizational learning that
enables double-loop learning. Double-loop learning is
defined as “those sorts of organizational inquiry that
resolve incompatible organizational norms by setting new
priorities and weightings of norms, or by restructuring the
norms themselves with associated strategies and
assumptions.” [11] Creating a learning environment for
managers to support the change of mental models is thus
another prerequisite for the methodology in question.
Improving mental models is the open-ended process of
explaining, testing, and revising managerial assumptions.
Developing new business models, which is based on this
learning process, is not a straight-forward task. It also must
be iterative and flexible, because it is highly unlikely that
the first proposed model would be complete and accepted
by all participants as the best that can be found. A
methodology for such a design process thus has to support
iterative expansion and change.
The final prerequisite is that it should be grounded on
theory and practically applicable. This is sometimes seen
as a contradiction or perhaps as a tradeoff between rigor
and relevance is posed. In reality both dimensions are
equally important: A methodology that is not grounded on
rigorous theory will not provide reliable results and will
always be challenged by someone who is not satisfied with
the outcome. On the other hand, the methodology has to be
practically applicable in order to be of any relevance to
managers at all.
What is the evolaris methodology?
Our proposed methodology is based on system theory and
combines aspects of system dynamics, thinking in networks
and action research. As described above, system theory
forms the analytical foundation upon which businesses and
business models are analyzed. It was designed to handle
social systems and is a well-established concept. Moreover,
system dynamics is a method to enhance learning in
complex systems. Just as an airline uses flight simulators to
help pilots learn, it is, partly, a method for developing
management flight simulators, often the use of computer
simulation modelshelp us learn about dynamic complexity,
understand the sources of policy resistance, and enable the
design of more effective policies [5]. It is important that in
contrast to traditional simulations accuracy is not in the
focus here, but rather the process of learning from modeling
and the insight gained from multiple simulated scenarios.
“System dynamics is an approach that should help in
important top-management problems… The attitude should
be for major improvement… The attitude that the goal is to
explain behavior, which is fairly common in academic
circles, is not sufficient. The goal should be to find
management policies and organizational structures that lead
to greater success.” [12]
Systems thinking, understood as thinking grounded in
networks, provides a way to get from a systemic and
holistic background to a methodology for solving problems.
[13]. The theory, upon which it is based, has been shaped
by the St. Gallen School of thought and is designed for
specifically complex problems. Gomez and Probst
developed a methodology based upon it that is practically
applicable.
Finally, action research is a methodology for researching
social systems, where, in contrast to natural science,
replicability is not the goal. In this process the researcher
enters a real-world situation and aims both to improve it
and to acquire knowledge. As true replication cannot be
attained in social systems, an action researcher has to
archive a situation in which the research process is
recoverable by interested outsiders. In order to do this it is
essential to state the epistemology, which is the set of ideas
and the process in which they are used methodologically,
by means of which they will make sense of the research,
and so define what counts as acquired knowledge [14].
The evolaris methodology for developing business models
for eBusiness uses the above presented concepts in the
following combination:
The methodology follows, the methodology of Probst and
Gomez, in slightly modified form, for solving real world
problems, which is based on the newer system theory. The
evolaris methodology thus fulfills the criterion of being
grounded on theory as well as being practically applicable.
The steps are presented below:
1. Identify the problem from different perspectives
on it.
2. Identify key factors of the problem.
3. Model the core reinforcing and balancing feedback
loops.
4. Expand the model to full a network.
5. Recognize and interpret possibilities for changing
the problem situation, recognize steering potential.
6. Develop action plan.
All these steps are iterative and not as linear as presented
above, which means for example, that if new information is
acquired, one constantly has to switch back to the problem
analysis stage, which supports iterative expansion and
change. Furthermore, it is very important that the whole
process is carried out in a team of managers and
researchers. A manager would not accept a model of his
reality where she/he has not been involved in the design
process, especially if the manager knows that the purpose
of the model is to make decisions for which she/he will
ultimately be responsible.
System dynamics is used for various reasons: First, system
dynamics models are a convenient way to map mental
models as well as business models and make them explicit.
In this way, structuring and sharing of knowledge are
facilitated. Second, the process of modeling itself is very
important. Arguably, the main purpose of modeling is to
learn in teams–-modeling as learning. System dynamics
with its ability to simulate finally provides a way to create a
learning environment. In a management flight simulator
risk-free experiments are possible and the time delays
between action and result can be shortened or delayed in
order to make interrelationships more obvious. The
managers can create their own models and conduct their
own experiments.
evolaris acts in the role of an action researcher, one who
formulates hypothesis and moderates the process. Action
research demands that the process and results of
researching are recoverable by interested outsiders. Thus it
is a way for transferring knowledge between businesses and
the academic community case and enables inter-company
learning.
Why evolaris?
evolaris is a joint venture of major Austrian enterprises
from different industries and research institutions. The core
values of evolaris revolve the facilitation of connecting,
exploring and changing. For the business partners of
evolaris, this endeavor supports these values by providing
the theory behind, and the methodology for transforming
their business models. However, it also clarifies the
potential impact of the Internet in general as well as within
certain industries. evolaris moderates the entire process of
developing a new business model and provides valuable
input through its experience with different industries and
strong academic network. In this way an optimum
combination of rigor in methodology and relevance of
outcomes can be achieved, which is one of the most
important success factors of evolaris.
Results
The presented methodology is the result of interdisciplinary
research carried out at evolaris. It is currently applied and
evaluated in various business cases with international
companies from various industries.
Acknowledgements
At this point we want to thank all industry partners and
public institutions that made the –foundation of evolaris
possible through their commitment and financial support:
The business partners: AVL List GmbH; Inet-logistics;
Gebrüder Weiss transport and logistics; Salomon
Automation; STEWEAG; Styria Media Stock Corporation
The academic community, in front of all Prof. Rauch, Prof.
Posch and Prof. Schilcher (Universities of Graz) and the
valuable editing skills of Ms. Audrey N. Selian.
The public hand: Federal Ministry of Commerce and
Employment; Styrian Provincial Government's Department
of Commerce, Finance and Telecommunications; Styrian
Provincial Government's Department of Innovation,
Infrastructure and Energy; Styrian Business Support
Association and the City of Graz
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