Demystifying Business Models: Exploring Their Evolving Nature, Scope and Role*

The changing nature of business and competitive environment, and the advent of new technologies, have moved the discussion of business models from the backwaters of strategy to the mainstream of business management literature.  Though increasingly common in management discussions, research publications and business writings, there is a lack of clarity on what it means, and its relationship to similar concepts such as strategy and innovation. A good understanding of the concept of business model is useful as the drivers that underpin its evolution over the last two decades are applicable in a more impactful way in businesses that leverage information technologies, including AI and machine learning.  This is particularly so, as Business Model Innovation (“BMI”) is emerging as a new frontier of competition. Our lens to view business models, therefore, needs to be recalibrated to reflect the change in the technological, business, and competitive context.

The purpose of this paper is to propose a framework to understand the concept and the role of business models in strategy and innovation.  To do this, this paper is divided into five main sections. The first section covers the reasons for business leaders to understand the role, context, and applicability of business models, particularly in the context of changing technologies and business environments.  The next section provides a brief background and the reasons behind the rise of business models.  This is followed up in the next (third) section with a definition of a business model and a detailed discussion of its core concepts.  The fourth section discusses the properties of business models. The final section discusses various ways in which a knowledge of business models is useful for business leaders. A summary concludes this article.

1. What do Business Models do?  

A robust understanding of the nature, scope, and role of business models matters to a business leader for various reasons. 

Business models are increasingly seen as playing a key role in organizational performance that overlaps with strategy in many respects, but is distinct in other respects. It, therefore, provides an additional, and sometimes unique, source of competitive advantage that firms can compete with (Casadesus-Masanell & Ricart, 2010).  

Business models, and in particular business model innovations, commercialize new technologies and products based on them. (Zott, Raphael, & Lorenzo, 2011). In this two-way relationship, business models are both a product as well as a facilitator of technology and product innovations.  A deeper understanding of business models, therefore, plays a role in the commercialization of innovative products based on new technologies. An example was provided by Xerox’s use of leasing as opposed to an outright sale of its (then) new copier called Xerox 914, which enabled it to become one of the most profitable firms of its time (Chesbrough & Rosenbloom, 2002).

Business models also play a role in the creation of new businesses and industries to address previously unmet needs in a commercially viable way.  The container and meat packing industry, the rise of traveller’s cheques (later replaced by cards and now by digital payment apps), Vanguard’s passive investing model, and Apple’s iPhone ecosystem provide a few such examples. 

From an organizational viewpoint, established business models develop their own cultural fingerprints – a sort of this is how we do things here – and influence a range of processes from resource allocation, new product development to talent building and more. An unawareness of the business model and its cultural impact could stifle organizational change including the innovation and new product development process.

Finally, as mentioned in the introduction, various drivers underpinning the usage and innovations in business models in the recent past are at work in a more impactful way with the rise of various AI technologies and may alter the ontology of business models in the future. Understanding these drivers equips business leaders with an additional lens on the potential and application of AI technologies.

The above points are further expanded, after drawing from the discussion in this paper, in the last section that sets out the implications for leaders.

2. Why did the idea of business model become popular with all its ambiguity?

Though used commonly, a business model is an ambiguous and confusing term, and “scholars do not agree on what a business model is…the business model is often studied without explicitly defining the concept” (Zott, Raphael, & Lorenzo, 2011).  

Perhaps the simplest and most intuitive definition of a business model was offered by Michael Lewis who noted that “All it really meant was how you planned to make money” (Ovans, 2015).  Though it provides a good start, it should be noted that this seemingly simple question, in practice, is not always so simple to answer except at a very high level of generalization. In a survey, 62% of the executives who responded had a “difficult time succinctly describing how their own company made money” (Shafer, Jeff Smith, & Linder, 2005).  This may be likely because modern organizations are complex with multiple businesses and business models, value chain activities, and what optically seem like an answer may at a deeper level be full of nuances.  As an example, it is easy to infer that GE in the 90s (or prior) was making money as an industrial seller of heavy machinery.  However, in 2010, “service contracts made up around 75% of GE’s unfulfilled orders of more than $225 billion — amounting to over 18 months’ worth of revenues — and contributed around 80% of its industrial earnings” (Govindarajan & Immelt, 2019).  Similarly, it is not universally appreciated that the main revenue source for traditional newspapers was advertisements as opposed to revenue from selling newspapers.

We start with Teece’s definition of business models, i.e., “how the enterprise creates and delivers value to customers, and then converts payments received to profits” (Teece, 2010).  Viewed in this context, business models were in existence as long as firms were doing business, and each firm has a business model (Casadesus-Masanell & Ricart, 2011), whether or not it is expressly articulated or even understood.

To some extent, the relative ignorance of business models in the traditional strategy literature can be attributed to the supply-side economics that “traditional” strategy literature grew up in. As Teece (2010) noted, “The absence of consideration of business models in economic theory probably stems from the ubiquity of theoretical constructs that have markets solving the problems that in the real-world business models are created to solve.”   It is, however, worth mentioning that business models – implicit or explicit – did exist earlier, it is just that they did not have the attention and variety that resulted from the advent of new technologies and other contributory factors.

The usage of business models started becoming common since the mid-1990s mainly due to the advent of technology (Amit & Zott, 2001), which made it possible to discover new ways of organizing and delivering value to customers.  The rise of globalization also led to the exploration of different markets that have different needs and user behaviors, and needed new ways of doing business to tap them. New management ideas and practices such as exploring “bottom-of-the-pyramid” (Prahalad & Hart, 2002) and “reverse innovation” required new ways to create and exchange value with the customers, if opportunities were to be harnessed, and innovative business models provided means to do that 

The nineties also saw the rise of globalisation, complex supply chains, and a higher customer-centricity.  “In many sectors, the supply-side driven logic of the industrial era has become no longer viable.” (Teece, 2010).  These developments contributed to the rise of a demand-side economy, and firms innovated with value propositions to meet the varied and sophisticated consumer needs that newly found expression and with new technologies became possible to address. 

Though the above developments, particularly in the 1990s played a role in bringing the term “business model” into the mainstream, the term itself was used loosely. This was particularly the case in the dot com bubble, when firms prioritised online traffic, screentime, and platform dominance over finding a business model that monetizes online traffic and makes e-business viable on a sustainable basis.  As Micheal Lewis is believed to have said in the context of the dot.com era, the term business model came to be used to denote all kinds of half-baked plans (as cited in (Magretta, 2002)). 

To summarise, there are both supply-side and demand-side reasons behind the popularity of business models.

On the supply side, it is possible now, given the advances in technology and general economic infrastructure, to create different ways of doing business. A given strategy, therefore, can be implemented through various business models. The rise of FinTechs and Neo-banks in financial services provides an example.  Increasingly, innovations in business models are seen as a way to create value and gain a competitive advantage.

On the demand side, given the general advancement in the economic and business environments, users now have new, more sophisticated/ specialist, and granular needs. In addition, users are looking for ever-so-higher value that they receive from the products/services they buy. This demand-side dynamic spurs the need for businesses to come up with business models that maximise the value and level of alignment between user needs and the value they receive.

3. Business Models: Definition and Conceptual Framework

Business model in its current usage, “… is not one concept; it is many concepts” and is referred to as a statement, a description, a representation, an architecture, a conceptual tool, a template, a framework, a pattern (Zott, Raphael, & Lorenzo, 2011), a business recipe (Baden-Fuller & Morgan, 2010), and the “logic of the firm” (Casadesus-Masanell & Ricart, 2010). With such a range and variety of usages available, it is not surprising that there is no universally accepted definition of business models.

That there is no single universally accepted definition is, however, not unusual in business management, as historically long-standing and coveted concepts such as strategy and leadership also share the same fate.  Strategy, for example, is called a fuzzy discipline (Fréry, 2006) and, as Mintzberg and Lamel noted a quarter of a century back, “Almost half a century after seminal works in the field, corporate strategy boasts of at least 10 separate schools of thought and more than a dozen definitions that focus on rather divergent perspectives” (Mintzberg & Lampel, 1999). They referred to this abundance of types of strategies and perspectives as the “Strategic Safari”.

3.1 Definition

Given the varied usages of the term, an often-used approach is to discuss business models by referring to their components, as opposed to the whole gestalt of the concept, and existing research suggests that scholars differ on components as well (Shafer, Jeff Smith, & Linder, 2005).   Though there are numerous definitions of business models of varying levels of technical complexity, this paper takes a simpler and practitioner-oriented approach to defining a business model.

In this paper, a business model refers to the configuration of value-chain and network activities, resources, processes, and partnerships that underpin the value creation and exchange process, and provide an underlying logic for the economic performance of the firm.

3.2 Core Concepts 

The proposed definition is a simplified and practitioner-oriented summarisation of business models. It builds on existing definitions by including their main elements, such as value creation and its exchange, and value-chain activities (including network partnerships, which increasingly play an important value-add role).  Below is a description of its three main concepts, namely, configuration of value-chain and network, economic logic and activity/feedback cycles, and value-exchanges that underpin our understanding of business models. It is worth stressing that it is the nature of relationships among these concepts – including their interaction effects- that gives effect to a given business model.

a) Configuration of value-chain and network activities

As discussed earlier, the rise in the forms and the variety in business models coincided with a rise in the demand-side economy, advances in technologies, globalisation, new management practices, and a general rise in entrepreneurship.  These changes provided options to source, configure, and develop alternate ways to perform value-chain activities in a way that is materially different from the established generic industry value-chain.  That a generic value chain can be configured variously to enable different ways to create and exchange value is one of the core ideas that powers the rise of business models.

Netflix’s use of a DVD-by-post subscription model (now itself superseded by a video streaming model) provides one such example.  “The idea that a simple business model innovation—such as using a subscription model rather than a pay-and-take-along model—could be the difference between a thriving movie rental business and a languishing one is fascinating.” (Massa, Tucci, & Afuah , 2014). Other examples include Dell’s direct selling model, the sale of software as a service, and the use of social media to stream content (as opposed to traditional mediums such as TV or attendance at the event). These ideas exemplify an innovative value proposition, which was made possible through new value chains that differed from the established industry value-chains.

Value-chain configuration (of resources and activities) as used above differs in qualitative terms from typical changes in value-chain activities obtained through outsourcing to suppliers. Automobile and other industries outsource various activities externally and obtain components and services from suppliers.  However, such arrangements do not materially change either the generic value chain, the final product, or the basis for value exchange. In this traditional context, suppliers are filling in the gaps (albeit in a cost-effective way) within the established value chain, which along with the final product remains a “constant”.  Value-chain configuration in the context of business models is about making significant changes or enhancements in the generic value-chain itself, or the creation of a new value-chain, that, in turn, leads to a different value proposition, or a different way of exchanging value.  In a sense, “…all new business models are variations on the generic value chain underlying all businesses.” (Magretta, 2002). 

The opportunity to configure value-chain variously is an outcome of general business, economic and importantly technological progress over the years that created a business eco-system in which activities and resources of varying levels of sophistication, functionality, and use cases are available that enable the creation of innovative value chains.  This ecosystem thus makes it possible for firms to consider various combinations of plug-and-play activities available, and develop a firm-specific value chain. The banking industry provides an example, where various new business models, such as purely digital banks, distributed banks (plug and play, as in Apple or Google Pay), relegated banks (back office and risk management only with customer interface ceded to Fintech), disintermediated banks (peer to peer lending) emerged as a result of variations in value-chain activities and the distinct value propositions they support.

Value-chain and network configurations are a key part of a business model, because they underpin the economic logic of the business, and thus play a key role in the viability of the business while recognizing that they could also contribute to strategic advantages, such as innovation, speed to market, flexibility, and therefore have implications for strategy.  A successful business requires both economic as well as strategic viability of its value proposition. (Note: Unlike strategy, which is primarily focused on market share, sales, competitive position, etc., business models are primarily focused on the economic logic of the value chain and network configuration that leads to economic viability). The value proposition of distributed banks is, for example, different from main banks, as their value chain is configured and optimised for digital and mobile payment services, as opposed to main banks, which also offer trade financing, mortgage loans, and other financial services.

b) Virtuous and Self-Reinforcing Activity Cycles

While the configuration of value-chain and network partnerships underpins the value creation, a key principle in its design is that the configuration should contain, represent, or follow a logic that forms the basis of economic viability and ongoing performance of the business. Thus, a business model is not just any configuration of value-chain and network activities that creates value; rather, it is a configuration that is based on, or contains within it, an economic logic that is the basis of business viability and performance on an ongoing basis.  To the extent, a configuration (of value-chain) without an underlying economic logic leads to performance, it is an example of economic rent-seeking as opposed to a value-adding and sustainable business model. The collapse of various dot com firms in the last century is an example of the former, while Google (cited earlier), PayPal and eBay are some of the examples of the latter.

A corollary of the above design principle of configuring a value-chain and network based on an economic logic is that its main activities reflect self-perpetuating, recurrent cycles and feedback loops. This organization of activities is easier to effect if there is an enduring economic logic at the business model level. A business model is not a representation of every activity; rather, it aims to capture only the salient activities and relationships that (1) have a significant impact on value-creation and exchange; and (2) form self-reinforcing feedback loops with the value-exchange and performance.  As (Casadesus-Masanell & Ricart, 2011) noted, “Above all, successful business models generate virtuous cycles, or feedback loops, that are self-reinforcing.  This is the most powerful and neglected aspect of business models.” Southwest Airlines provides an example of self-reinforcing loops. Its value proposition of low cost, no frills, and on-time is tightly integrated and reinforces business model choices, such as a single model fleet, short-haul frequent flights, and connections between secondary airports to form a tightly integrated feedback loop (Goldberg & Weiss, 2018).

The idea of a recursive or self-reinforcing feedback loop implies that a given value-exchange makes the same or a related exchange (possibly a different part of the value-chain) in the future more likely and efficient by providing more volume, learning and feedback, customer-lock-in behaviour (as in a razor-blade model), and triggers additional revenue streams.  These effects lower the incremental cost and/or lead to a better value to a customer, and when repeated iteratively over time, they reinforce the performance of the revenue/cost model.

A recursive and self-reinforcing operational, commercial and financial feedback loop is one of the salient characteristics of a business model, and is both its component as well as an outcome of various choices made in the areas of strategy, value-chain and network configuration. Given this broad property, it is not uncommon that it is sometimes used as a representation of a business model, such as a razor-and-blade model and a subscription model.

The relationship between the configuration of the value-chain and value exchange in terms of its (material) impact on operational performance and feedback loops, however, can be complex, as value exchanged can also be in denominations other than money (such as access to users, data, technology licenses and feedback), which may impact performance in non-commercial, but important ways, or could indirectly lead to other revenue streams (such as advertising). Value-flow maps may not always coincide with revenue flows for an additional reason. Firms often have more than one business, and a given business may have more than one business model, multiple revenue streams, intertwining business strategies, and a shared infrastructure across the firm. Revenue flow relationships, therefore, may be different, and likely to be a subset of value-flow relationships. To use a common example, social media firms provide free service (platform) to users that generate data, which is used for various purposes, including generating revenue from advertising, event promotions, content selling, and apps selling (app stores) and in some cases to develop related services including AI research.

c)  Value-exchange

The concept of value-exchange (including value capture or appropriation) is at the core of business models, and also intersects with business strategy.  Value exchange refers to what is it that a user gets by buying the product/service – a short-hand way of understanding why a user should buy a particular product and service.  (Note: A corollary to this question, as to why a customer should buy a product /service from a given firm as opposed to from its competitors, is one of the main tasks of strategy and is covered separately.) In theory, one of the purposes of value exchange is to maximize the degree of alignment between the incentives of the firm and the user, and a business model with the configuration of its value chain and virtuous activities provides a means to do it.

In view of the visibility of the basis of value-exchange, particularly when new ways of exchanging value are introduced, many business models become known or characterised by them. Examples include freemium, subscription, franchising, pay-as-you-go and software as a service.

Value exchanges implicate business models, as the value-chain and network activities, and resources that underpin them, need to be configured to form an economic logic that aligns with the method and the basis of value-exchange, and thereby contributes to economic viability and performance.  A value proposition of low-cost flying is less likely to perform well if the airline’s value-chain choices are similar to a full-service airline. 

Though the basis of value exchange is the most visible and impactful part of a business model – and sometimes serves as an archetype of a business model (Massa, Tucci, & Afuah , 2014) – it is both a driver as well as an outcome of changes in the value chain.  For example, Michelin’s pay-per-mile program led the firm to find innovative ways to improve tire performance, which involved software solutions and tire-pressure monitoring systems (Gupta, 2018). Similarly, Philips entered into an arrangement with Amsterdam’s Schiphol Airport to provide “lighting as a service” under an arrangement called “pay-per-lux”.  In this arrangement, Philips, instead of selling products, sold a service, and as a result, it needed to develop products (bulbs, light fixtures, etc.) that could last longer (Gupta, 2018). Thus, a change in the basis of value-exchange has both upstream and downstream implications, and in that sense differs from pricing, which may have an impact in the competitive and commercial sense, but a marginal impact on the “nature” of the value-chain itself.

It is worth noting that given the advancements in technologies, the scope of value-exchange has expanded from monetary considerations (price and cost) to data, attention, feedback, user-generated content, product improvement ideas, etc.  This has an important implication, as different sources of value, each of varying importance to value-chain and network partners, can be traded off to formulate a new economic logic – and a business model – that could form the basis of business performance.  That not every source of value (time, data, feedback, user-content, etc.) is of equal importance to all network participants enables a firm to formulate what otherwise would have been a zero-sum economic proposition to a new win-win logic – and a viable business model for all network participants.  Google’s use of the advertisement-based model, where relevant advertisements are shown along with organic search results, to provide a free search service is an example of the formulation of economic logic based on integrating different sources of value in the network chain, which are valued differently by network participants. 

4. Key Properties of Business Models

Based on the contextual background and definition proposed in the previous sections, it is possible to identify a few properties of business models.

1. Business models are more generic than a business strategy (Teece, 2010). They also tend to be static and inflexible, as they represent a commitment to activities and resources. They represent an underlying logic – a proof of concept – on how value-chain and network activities and value-exchange lead to the economic viability of the business. When in practice for some time, they get hard-coded as an organizational practice, and any decision to pivot to a new business model is a significant business decision. If in existence for a long time, they also develop their cultural signatures and contribute to an organizational mindset, which, in turn, influences how a firm allocates resources, identifies opportunities, and builds talent.
2. Business models are frequently confused, and often interchangeably used, with strategy. While the relationship between the two is a subject matter for the second paper in this series, a few observations can be made here. Strategy is mainly concerned with choosing product-markets, offering a compelling value proposition, addressing competition, and building a competitive advantage. Business models are about the configuration of value chain (and also platforms and eco-systems) to create an underlying logic that forms the basis of the economic performance of the business. Business models serve as an execution framework for strategy noting that the relationship between the two is mutual.
3. The “right” business model is in the context of a firm’s history, resources, customer value-proposition, value-exchanges, risk appetite strategy alignment and operational capacity. Generally speaking, most industries have a set of core business models, and firms may vary their design features to adapt them to their needs. The gaming industry provides an example. The industry has a variety of business models and segments, such as mobile gaming, Cloud streaming, Console-based gaming, gaming platforms, and now an emerging model called esports. Though one such model, the console-based gaming, served as a core model and is used by three main firms (namely, Sony, Microsoft and Nintendo), its actual application varied over a passage of time in terms of cross-platforming, cloud streaming, and access to games.
4. Whether or not expressively articulated and whether or not used as a source of competitive advantage, a business model always exists in an ongoing business. (Note: It is generally argued that the failure of most dot-com firms was due to a lack of a business model. This is a separate topic in itself, and for this paper, the position is that each established or ongoing business has a business model, whether or not it is expressed, used, effective, or profitable. It is to be noted that many firms, particularly those based on technology, iterate with options, and their “final” business model emerges once their product or service has gained sufficient traction. The statement “how to monetize” reflects this challenge in the case of many technology start-ups.) Further, revenue and cost models are not the same as business models. They are an important feed into the operational performance, and to that extent, components of a business model, but they themselves are not business models.  Though the main revenue model may be based on a business model, a firm can have multiple revenue streams within it.
5. It is argued that business models should pass two critical tests, the narrative test (the story or the economic logic should make sense) and the numbers test (the P&L should add up) (Magretta, 2002). Business models represent a holistic and systemic approach covering both what businesses do and “how they do it” (Zott, Raphael, & Lorenzo, 2011). The narrative part addresses a commonly held view of a business model as an explanation of “how it makes money”.
6. Business models need to be understood as a distinct unit of analysis in their own right (Zott, Raphael, & Lorenzo, 2011) as impacting organizational performance. It is not uncommon to find organizational success being attributed to its business model, which is defined in this paper as a configuration of value-chain and network activities based on economic logic. Uber and Airbnb are two such common examples. Business models comprise a distinct unit of analysis, because they increasingly leverage processes and activities that reside outside an organization – and also not a part of traditional firm or industry level performance constructs – to create value. Trying to understand organizational performance as primarily a firm or an industry construct therefore runs the risk of missing out on the important role played by network activities and partners that are part of a business model, but may reside outside the organization and perhaps outside the industry.  As was noted in the context of Apple, “…consumers buy (and infrequently upgrade to new versions of it) this incredible device in order to access content, apps, and data made in large part by companies other than Apple.” (Ball, 2022).
7. Business models evolve as a hierarchical construct, and its usage depends on the unit of analysis selected. Using industry as a unit of analysis, the Cloud industry, when it first started, could be classed as a new business model in relation to the (then) IT providers, as it represented a new way to address the hardware and software needs of a business. It changed the basis of IT infrastructure from a capex to an operating expense for the firms. This sub-set of value-chain, however, over time, became an industry in itself, and within this industry, various business models evolved, such as software as a service, computing as a service, and IT infrastructure as a service each requiring a different resource configuration, addressing a different cut of “eco-system” of needs, and having different nature of feedback loops.
8. The relationships between activities configuration, value creation and exchange, and financial impact are ideally recurring in nature, and reinforced and finessed with each turn of the feedback loop. This is exemplified by the razor and blade model, which involves subsidizing razors to drive the sales of blades, which involve recurring sales and margins.
9. Organizations are in constant pursuit of improving their business model by finessing, adapting, and adding enhancements to it. Whilst significant changes in business models are not so common, evolutionary and incremental changes happen, whether due to changes in strategy, reaction to unsatisfactory performance, or as a by-product of organizational evolution.  In IBM’s history, for example, there were changes of both transformational and evolutionary nature when it transitioned from a tabulating machine company to a hardware manufacturer to selling mainframe computers, minicomputers, and PC hardware (Ovans, 2015), to enterprise-level software services and then to industry and company-specific .  Though these transitions represented changes in the strategy, they represented changes in the business models as well. From its early days as a vertically integrated (industrial computing) firm, IBM adapted its business model to a consumer product (hardware) and then to a software and industry and company-specific solutions firm.
10. An organization can have more than one business model when it competes in multiple industries, each with its own business model though synergies and mutual relationships among them may exist. Amazon (which has its e-commerce platform, but also cloud services business and online video streaming business) and universal banks (which generally are in retail banking, wealth management, corporate and investment banking) provide few such examples. At the same time, it is also likely that a firm is in one industry, but has different business models that are (ideally) integrated enough to support a given strategy. Various store-based retailers use versions of e-commerce platforms to varying levels of success.  In the airline business, LAN airline (a Chilean carrier) operates three business models, . Though these are different businesses with distinct value propositions and therefore with different strategies, LAN’s business model in unique as it derives appreciable (fluctuation from 11% to 18%) revenue from cargo, which is transported “in the belly of wide-body passenger aircraft” (Casadesus-Masanell & Tarziján, 2012). Similarly, while its full-service and no-frills domestic airline represent two different strategy choices leading to two different business models, many airlines have struggled to achieve a simultaneous execution of these two strategies and business models. To be effective, however, it is important that its business models are not at cross purposes with each other and are executed well.  Blockbuster tried to compete with Netflix with its DVD subscription service integrated with its store model without much success. Building the right business model and innovating on it is as much of an art as a science. By its very definition, a business model requires a deep and experienced understanding of how resources are configured and their relationship with value exchanges – a task that requires important (and hidden) nuances to be factored in whilst making improvisations in it. Netflix’s business model, for example, evolved from fees per rental to a monthly subscription with a fixed number of DVDs and finally with an option for unlimited rentals.  In its very initial days, it also sold DVDs from its website but discontinued the practice in a pivotal decision after it concluded that selling DVDs and rentals are different value propositions.
11. It is important to be aware of the limitations of the business model. While a “right” business model plays an important role in contributing to a firm’s success, it may not be sufficient to generate performance all by itself. Having an established and right – or even innovative – business model does not guarantee sustainable success (it needs to be supported by strategy and execution capabilities). An example is provided by the challenges that Intel, a leading chip manufacturer, is currently facing. Intel’s business model of being a vertically integrated firm for the PC and server chip markets was immensely profitable and it enjoyed the status of being a market leader in the chip industry as a whole. While the reasons for its decline are varied and complex, its failure to pay heed to the mobile chip market initially and then the AI chip market contributed to its failure to capitalise on the two emerging chip markets. At the risk of simplifying a complex discussion, Intel’s business model (vertical integration) served it well, but it aligned well with the declining market (computer and server chips) and not the emerging markets (mobile and AI chips). One of the main questions being discussed in the context of its revival plan is the business model it needs to follow: whether to continue with vertical integration or become a fabless chip manufacturer. Similarly, as an obvious point, a wrong, misaligned or obsolete business model undermines performance even if strategy and execution capabilities are well-placed.  This is exemplified by the failure of Barnes & Noble, and, in a more compelling way, by the decline of the industry itself from 1999 until 2013, around which time newer business models (with digital format and subscription-based services) led to its revival.
12. The use of a business model as a separate construct gives business leaders an additional option to innovate and compete. Increasingly, firms compete through their business models (Casadesus-Masanell & Ricart, 2010) and business model innovation is emerging as a new field in the strategy literature to gain a competitive advantage.  In one research on business models, it was noted that “…while the choice of a particular business model is important to explain competitive advantage, it is the particular implementation of a business model (i.e., the degree of key choices such as relative emphasis on customer service or new technology even keeping the same business model) that explains performance.” (Brea-Solis, Casadesus-Masanell, & Grifell-Tatje, 2015) as cited in (Massa, Tucci, & Afuah , 2014).  The example of Southwest Airlines provides a lens to it. Its business model of low cost, no frills, and reliability was implemented through choices, such as direct sales, no interlining of passengers and baggage, direct flights (did not operate hubs-and-spoke model), and standardized 737 fleet – and many other choices contributed to the success of lost cost, no frills and reliability model (Teece, 2010).

5. Implications for leaders

The rise in popularity of business models leads to another – a more practitioner-related question – as to its value for a business leader, given that business models are largely , and, if successful, can be copied and thus not a source of sustainable competitive advantage, which is a holy grail of strategy. 

Though covered in a general way in the beginning of this paper, it is now possible to spell out implications for leaders in a more detailed manner.

1. A review and assessment of the business model (along with strategy) helps to expand the list of “true” reasons for a firm’s performance. Given that business models and strategy have different properties, require different commitments and skill-sets, and operate over varying time horizons, it matters for the organizational performance that problems attributable to the business model are not “fixed” through strategy, and problems that are due to poor strategy are not “fixed” by changes in the business model.
2. Business leaders increasingly face competition from firms that are in the same eco-system, but not the same industry. For a business leader, this means that competition now additionally and potentially comes from firms that are not in the same industry, but are in the same or competitive ecosystem. Such firms are likely to have different value-chains, partnerships, and resources, or in other words, different business models. These business models may give them a different mix of advantages and disadvantages, which may have varying implications for legacy firms. The competitive threat profile when the basis of competition is business model-based as opposed to strategy-based is different. The rise of Fin-Techs provides an example, where technology firms have entered into the payment, micro-finance, and related industries.   Similarly, in China, Tencent and Alibaba entered into the loan market based on their access to the vast data of their users, which is then leveraged to offer loan services. This is a novel way of doing business (or a business model) with different implications for market access, profitability, and customer experience. Whilst legacy banks may not be able to offer similar services, as they are business model constrained, they need to appreciate that their disadvantages, if any, are based on limitations of their business models as opposed to strategy.  In the context of a network competition, strategy improvements may give incremental results and a full solution set may require a consideration of both strategy and business model.
3. Business model lens opens up a large number of decision areas – and opportunities – for leaders to create and exchange value using different combinations of value-chain configuration, value proposition, and basis of value exchange. Whilst strategy is hardwired into the leadership agenda, discussions on business models are not usually a default practice.  This requires a re-think, as in the evolving competitive and business landscapes, two main changes are happening: Firstly, the basis of competition has expanded to include business models. Secondly, business models are not as generic, static, and standard as they used to be in the past. With improvements in technology and a changing business environment, there are options to create value using different business models.  The combined effect of these two changes is to provide business leaders with more “degrees of freedom” in competing, and the first step is to make discussions on business models a default CEO agenda item.
4. Business models, particularly the long-established ones, serve as a cognitive /linguistic scheme (Massa, Tucci, & Afuah , 2014), almost serving as an organizational template on ”how to compete”, an equivalent to culture (“on how we do things here”) as applied to strategy.  This linguistic scheme and resulting organizational template could constrain an organization from the bigger picture.  As an example, Polaroid was a very successful firm in the era of chemical photography and relied on a razor-and-blade business model (a shorthand for saying that an expensive product, a razor /camera, is subsidized and the profit is made on high recurring volume, product blades/films). This model did not align with disruptive digital photography technology, which did not have a need for films.  The cognitive frame (and resulting strategic decision model), which was set in the old razor-and-blade-model, blinded leadership to the transformational changes in the industry leading to a loss of competitive position (Massa, Tucci, & Afuah , 2014).
5. While technology is an enabler of business model innovation, it also needs business models for successful commercialization. An innovative product or cutting-edge technology is not enough to ensure business success. It also needs a good business model.  Apple’s business model provides one such example. Its ecosystem, which consists of content as well as apps that integrate seamlessly with its premium products to generate strong network effects. Apple’s iPod in 2003 was not the first digital music player, but as an article noted, “Apple did something far smarter than take a good technology and wrap it in a sneezy design. It took a good technology and wrapped it in a . Apple’s true innovation was to make downloading digital music easy and convenient…the company built a groundbreaking business model that combined hardware, software, and service”. (Johnson, Christensen, & Kagermann, 2008).  Similarly, Xerox’s use of leasing as opposed to an outright sale of its (then) new (advanced) copier called Xerox 914, enabled it to become one of the most profitable firms of its time (Chesbrough & Rosenbloom, 2002).
6. Firms are increasingly undertaking digital transformations to compete and leverage new technologies. The potential of these technologies, however, to build a competitive advantage is contingent on the business models. As (Govindarajan & Immelt, 2019) noted, “Business models eat technology for breakfast.”

6. Summary

This paper looked at the nature and role of business models in the context of changing economic, competitive, and technological environments that businesses face and argued that in a demand-led economy, the salience of business models as a factor influencing a firm’s performance will continue to increase. To borrow and generalize Hertzberg’s two-factor theory in the context of this paper, business models are now more of a “motivational” and less of a “maintenance” factor for business performance.  The concept of business model, however, is ambiguous and used differently by practitioners and academics.  This paper defines business models as a configuration of value-chain and network activities that underpin value creation and its exchange based on economic logic. Business models are increasingly being considered as a separate unit of analysis to understand and explain firm performance. This is partly because a firm’s network partners increasingly play an important role in its success, but exist outside of the firm, strategy, and even industry, and a business model integrates their role and value-add into a construct that plays a role in business performance. Business models provide leaders with more “degrees of freedom” to compete.  Business models are closely intertwined with strategy, and superior performance needs a closely integrated mutual relationship between the two.   The rise of AI and related technologies is likely to further increase the salience of business models as an important lever in the firm performance machinery.

The next paper in this series analyses the relationship between a business model and strategy, two concepts that are both a source of rich debate and also confusion. The last paper in this series would cover the topic of business model innovation, which is emerging as a new frontier of competition.

* The author is grateful to Prof. Anil K Sood for his deep insights and feedback on the paper. Any comments, queries or questions on this paper can be addressed to iascc@ideassansideology.org. 

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