Business Model Innovation Proposal
This assignment has two components:
Discovering the Job
(A) Select a publicly traded organization (Wal-Mart) with which you are familiar (it can be your own company but one you have not yet used in this course or BMGT8130). Write a paper that describes a target customer group from your selected company that reflects a deconstruction of the job that the customer is trying to get done. Also, analyze opportunities for innovation using this new lens. You will be building on the results of this assignment in Unit 5, Assignment 1, for the Business Model Innovation Proposal.
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Business Model Innovation Proposal
(B) In section A, you identified and evaluated the job to be done for a target market segment or customer group. For section B, integrate the work from section A and prepare and submit a proposed business model innovation for this target organization. Define all of the proposed elements in the business model innovation, indicating the logic behind the element selection using a synthesis of the assigned readings and your research in support. Also, explain why this business model is innovative. Finally, explain the assumptions and trends upon which your business model innovation is based and how you will mitigate the limitations of the strategic assumptions in your model. As part of your paper, interweave some of the discoveries in preparing your post for this unit’s discussion.
PLEASE NOTE THAT GRAY AREAS REFLECT ARTWORK THAT HAS BEEN INTENTIONALLY REMOVED.
THE SUBSTANTIVE CONTENT OF THE ARTICLE APPEARS AS ORIGINALLY PUBLISHED.
WINTER 2018 MIT SLOAN MANAGEMENT REVIEW 65
BUSINESS MODEL INNOVATION has be-
come an increasingly hot topic in management circles,
and understandably so. No management activity is
more important than having clarity about how the or-
ganization creates, delivers, and captures value. It
requires, among other things, knowing what custom-
ers want, how value can be best delivered, and how to
enlist strategic partners to achieve maximum benefit.
Although the ability to develop strong value prop-
ositions can enable companies to “get by,” in our view
many of today’s most successful businesses are those
that are able to place themselves in the “sweet spot” of
business model scalability. Scalability is about achiev-
ing profitable growth and is therefore a fundamental
consideration for managers and investors alike. If
managers are incapable of factoring scalability attri-
butes into their business model design, they risk
being left behind, much the way bookstores owned by
Borders Group Inc. were eclipsed by Amazon.com Inc.
Over a five-year period, we studied scalability in the
context of more than 90 Scandinavian businesses and
also examined the experiences of a number of well-
known businesses, including Google, Apple, and
Groupon. (See “About the Research,” p. 67.) In the course
of our research, we identified five patterns by which
companies can achieve scalability. The first pattern in-
volved adding new distribution channels. The second
entailed freeing the business from traditional capacity
constraints. The third involved outsourcing capital in-
vestments to partners who, in effect, became participants
in the business model. The fourth was to have customers
Building Scalable
Business Models
S T R A T E G Y
Many of today’s most successful companies are able to
leverage business model scalability to achieve profitable
growth. Executives need to factor scalability attributes into
their business model design or they risk being left behind.
BY CHRISTIAN NIELSEN AND MORTEN LUND
THE LEADING
QUESTION
How do
companies
develop scal-
able business
models?
FINDINGS
�Scalable business
models are flexible
and turn new
resources into
increasing returns.
�Scalability often
involves connecting
strategic partners to
a company’s value
proposition.
�One key is to find
smart ways to lever-
age the resources of
partners.
66 MIT SLOAN MANAGEMENT REVIEW WINTER 2018 SLOANREVIEW.MIT.EDU
S T R A T E G Y
and other partners assume multiple roles in the busi-
ness model. And the fifth pattern was to establish
platform models in which even competitors may
become customers. Based on these patterns, we have
developed a framework for identifying potential
levers for business model scalability, along with a
road map that managers can use to improve their
business models.
Over and above the need to create value proposi-
tions that are difficult for competitors to replicate,
managers need to develop business models that are ca-
pable of achieving positive and accelerating returns on
the investments made. When companies restructure
or invest in acquisitions, it’s common for them to iden-
tify synergies that reduce costs and simplify workflows
and product offerings. However, simply thinking in
terms of synergies isn’t enough; such synergies don’t
necessarily lead to improvements in business model
scalability. To achieve scalability, managers and entre-
preneurs need to remove capacity constraints. They
have opportunities to do this in a variety of ways: by
collaborating with partners, by encouraging partners
to play multiple roles in the business model, by creat-
ing platforms to attract new partners, or even by
working with current competitors.
Accelerating Returns to Scale
What do we mean by “scalable”? We use the term
scalability to identify where changes in size or vol-
ume are possible and seem worthwhile. Scalability
refers to a system’s ability to expand output on de-
mand when resources are added. Linking scalability
to business models provides us with a framework
for discussing and estimating business potential,
which is important to both executives and many
stakeholders because, among other things, it has
implications for hiring and skill development.
Another important characteristic of scalability is
that the organization has sufficient flexibility to
grow while incorporating the effects of external
pressures, such as new competitors, altered regula-
tion, or macroeconomic pressure.
The first dimension of scalability is the degree to
which increased input can create higher output.
The second dimension of scalability relates to the
ability of the business model to accelerate the re-
turns on the additional investment. Accelerating
returns to scale are typically found in business
models where new resources, capabilities, or value
propositions provide completely new properties to
an existing industry.1 Amazon.com’s retailing busi-
ness model offers a good example. For example, the
company’s algorithms introduce customers to
products they may not have considered but might
be of interest to them as they shop online.
In those situations where returns to scale are de-
clining rather than increasing, managers should
figure out how quickly to exit the business. If the
returns are falling precipitously, it might make
sense to pull out quickly. Even when returns are flat,
further investments may be unattractive. As a
general rule, executives should invest capital where
they can generate increasing returns to scale.
Scalability Patterns in
Business Models
A scalable business model is one that is flexible and
where the addition of new resources brings increas-
ing returns. In the course of our research, we searched
for business model attributes that were sufficiently
flexible to cope with internal demands and external
forces and where the potential wasn’t constrained by
physical or material assets (such as labor shortages,
machine capacity, cash liquidity, or storage capac-
ity). Below we will examine the five patterns of
business model scalability individually.
PATTERN A: Add new distribution channels.
While the notion of selling through multiple distri-
bution channels isn’t novel, it’s useful to understand
what happens when an additional channel is added.
As long as the implementation of a new distribu-
tion channel does not cannibalize sales in existing
channels, adding a new sales channel can allow a
company to spread the costs of overhead and reap
benefits from increased sales.
We found this to be the case at Copenhagen
Seafood A/S, a Danish supplier of fresh fish. The
company, which had traditionally sold only to high-
end restaurants, added the sale of fresh fish directly
to retail customers, enabling it to offer restaurant-
quality seafood to individuals at reasonable prices.
Because restaurants typically ask for specific cuts
of fish, the percentage of waste can be high. By add-
ing the retail channel, Copenhagen Seafood was
able to cultivate a new clientele with people who
relished the opportunity to buy from a seafood
SLOANREVIEW.MIT.EDU WINTER 2018 MIT SLOAN MANAGEMENT REVIEW 67
supplier closely associated with some of the city’s
best-known restaurants.2
PATTERN B: Explore ways to work around tra-
ditional capacity constraints. Scalability often
means finding ways to overcome traditional capacity
constraints. Obviously, constraints vary from indus-
try to industry. In the pharmaceutical industry, the
constraints might involve the cost of establishing re-
search infrastructure and the ability to develop new
products and receive approval for new products.
However, when viewing constraints from the per-
spective of business model innovation, companies
should ask themselves if they can find ways to work
around existing constraints. In the private banking
sector, for example, a company might bypass capac-
ity constraints by focusing on customer relationship
activities and outsourcing infrastructure manage-
ment to others. In a similar vein, a consulting
company with a business model focused on hourly
billing for large government organizations explored
bypassing that constraint by marketing standard
outputs and simpler reports to a new customer seg-
ment consisting of smaller businesses.
PATTERN C: Shift capital requirements to
partners. Every organization needs to prioritize its
investments and determine which are most critical.
CFOs are encouraged to optimize the cash liquidity
constraints, cash flow, and working capital attri-
butes of their business models. Given that many
companies place a high value on cash, business
models that shift capital requirements to strategic
partners can be desirable.3
One company we studied was Sky-Watch A/S, a
company based in Støvring, Denmark, that devel-
ops and manufactures drones suited for a variety of
industrial settings. Sky-Watch’s business model has
fewer resource constraints than some of its close
competitors thanks to management’s decision to
concentrate on turning the core platform into an
open platform that allows customers and strategic
partners to add their own hardware and software.
PATTERN D: Leverage the work of partners.
Companies need to pay attention to what their cus-
tomers and strategic partners value. Managers should
use this knowledge to optimize the value proposition
of the products and services they offer to customers.
The key is to find smart ways to leverage the resources
of partners. For example, Tupperware Brands Corp.,
based in Orlando, Florida, is famous for leveraging a
community of sales representatives who have an in-
terest in selling the company’s food-storage products
to a widening circle of people. Groupon Inc. likewise
turns customers into partners by giving them incen-
tives to spread the word about the company. Similar
strategies can be leveraged for distribution methods,
building customer loyalty, giving access to resources,
and performing other activities according to the
value configuration of the business model.
PATTERN E: Implement platform models.
A variation on leveraging partners involves using
platform-based business models. Platform models
are based on collaboration and can take different
forms. For example, PrintConnect.com of Würselen,
Germany, operates a web-based workflow platform
for printing and packaging that links partners across
the value chain. Some platform business models
predate the web: Visa Inc., which connects busi-
nesses with credit card users, is an example.
When looking at business model innovation from
a platform perspective, an important question is,
“How do we turn competitors into partners or perhaps
even customers?” For example, The Relationship
Factory,4 a company based in Aarhus, Denmark,
that organizes professional networking groups for
managers, opted for a platform model to achieve
business model scalability. It makes its software
platform available to competitors on a private-label
basis, thereby providing the company with a sup-
plemental and recurring revenue stream on top
of its traditional service-based activities. While
ABOUT THE RESEARCH
Business models offer a novel perspective from which to understand
how companies can become profitable, competitive, and sustainable.
They offer distinct recipes for how companies do business,i including
activities and resources, customer relationships, partnering strategies,
and revenue models.ii
Our research focused on business model innovation in conjunction
with 10 networks of collaborating companies, where the companies were
collaborating either through joint ventures or via more open and informal
arrangements. The research, which was conducted between 2008 and
2013, was aimed at helping participating companies develop a process
for pursuing new global business opportunities and providing a solid
base of relevant qualitative data. A total of 92 Scandinavian companies
participated. We used longitudinal methods, augmented by a series of
semi-structured interviews, to examine business model innovation pro-
cesses. Our team followed the companies through workshops, company
meetings, board meetings, and observations, which were recorded and/or
documented with minutes, pictures, or video.
68 MIT SLOAN MANAGEMENT REVIEW WINTER 2018 SLOANREVIEW.MIT.EDU
S T R A T E G Y
competitors continue to rely heavily on their sale of
service hours, the company is able to generate in-
cremental revenue by selling “ease of use” to its
competitors as well as benchmarking data across
the industry.
A Road Map to Business
Model Scalability
The patterns we have discussed above describe how
companies can adjust their business models to make
them scalable. While traditional thinking typically
leads to synergy effects and, at best, positive returns
that are linear to the investments, some of the com-
panies we studied showed that it was possible to
redesign business models to achieve accelerating
returns. However, achieving accelerating returns is
not easy. It requires thinking strategically in terms of
the value propositions of stakeholders, strategic
partners, and customers involved in the immediate
business ecosystem. Aligning and leveraging the
competencies and motivations of these stakeholders
can lead to better cooperation. It can also build
greater trust and loyalty among partners, which will
pay off in the long term.
To implement the patterns for scalability, it is
often necessary to identify activities and resources
where collaborating with partners is advantageous
and can strengthen the offering’s value proposition
to customers. These patterns can assist managers in
rethinking how their business models make use of
partners, customers, and other stakeholders. Rather
than just relying on traditional analytical exercises
such as analyzing cost structures, product-segment
profitability, and market-segment growth, manag-
ers can work on achieving business model scalability
by asking a different set of questions. The questions
will often lead to the identification of new partners
and potentially new roles.
We suggest that companies pursue three steps:
1. Identify potential strategic partners. Scalability
typically involves connecting strategic partners to
the value proposition, either through sharing activi-
ties or resources. Given that scalability requires
thinking beyond simply sharing costs, executives
should ask themselves the following:
• Are there potential strategic partners that could
perform activities in our business model — or
provide resources to it — in ways that would help
improve the value proposition to our customers?
2. Ask questions that reveal a road map to scal-
ability. Asking questions can trigger ideas about
how to reconfigure a business model. When en-
countering novel ways of doing business, managers
should analyze how such a business model would
play out for their own company. We have found
that the following questions can be helpful:
• How does this novel business model challenge our
existing way of thinking about the business?
• What would we need to do differently to imple-
ment this
business model?
• Which other companies excel at what we are try-
ing to do, and what can we learn from them?
• What are the key value drivers of this particular
business model?
• Could this business model lead to scalability?
Based on the ideas you are able to generate, we
recommend using the following questions to help
clarify potential avenues for scalability:
• Are there potential strategic partners that can
offer features (at minimal or no cost to our com-
pany) that enrich the existing value proposition to
our customers, while receiving value themselves?
• Are there alternative configurations that free the
business model from existing capacity constraints?
• Would it make sense to establish a platform for
other businesses to buy into — and thus create
alternative ways of generating revenue?
• Is it possible to change the role of existing stake-
holders and utilize them in multiple roles in the
business model?
Achieving acclerating returns is not easy. It requires thinking
strategically in terms of the value propositions of stakeholders,
strategic partners, and customers.
SLOANREVIEW.MIT.EDU WINTER 2018 MIT SLOAN MANAGEMENT REVIEW 69
• Who would pay for either access to our customer
base or knowledge about our customers and their
characteristics?
• Which mechanisms are in place to create customer
lock-in?
• How agile is our company in reacting to threats
from new entrants or new technologies?
3. Analyze the scalability attributes of business
model options. When all of the ideas generated have
been presented, executives should facilitate a discus-
sion to start to evaluate potential business models.
They should analyze the attributes of the various op-
tions and consider how they might be configured to
achieve accelerating returns on investments.
Traditionally, some companies have developed
business models that focus on achieving economies
of scale while other companies have been more
geared toward creating economies of scope through
differentiation. We have found that scalability goes
beyond this traditional distinction and that identi-
fying the sweet spot of business model scalability
involves identifying accelerating returns on input.
In cases of declining returns to scale, managers
should focus on downsizing the business so as not
to cannibalize existing value. In cases where the re-
turns on additional inputs are constant, managers
should attempt to find ways to increase returns or
invest excess capital elsewhere. When the business is
able to generate positive, albeit linear, returns on ad-
ditional inputs, the existence of synergies can make
this a favorable place to be, although the company
may be stuck with a business model that is at best
average. In this case, managers should attempt to
improve their business model using one of the five
patterns described above.
Having a road map for business model scalability
can be enormously helpful for managers, whether
they are involved in developing new business models
from scratch or innovating, rejuvenating, or redesign-
ing existing business models. Although much of the
recent research about business model innovation ex-
amines the alignment between value propositions
and customer needs,5 business model scalability
depends on close alignment between the value propo-
sition and strategic partners.
The patterns we have identified as gateways to
scalable business models (for example, enriching
value propositions, removing capacity constraints,
and changing the role of stakeholders in business
models) provide avenues for managers to explore.
Identifying business model configurations that
allow for such characteristics should be a top prior-
ity for managers as they develop and review their
corporate strategies.
Christian Nielsen is a professor of business models
and performance reporting at Aalborg University
in Aalborg, Denmark, and at Inland Norway Univer-
sity of Applied Sciences in Norway. Morten Lund
(@mortenlunddk) is an assistant professor and
director of the Business Model Design Center at
Aalborg University. Comment on this article at
http://sloanreview.mit.edu/x/59206.
REFERENCES
1. C. Nielsen and H. Dane-Nielsen, “The Emergent
Properties of Intellectual Capital: A Conceptual Offering,”
Journal of Human Resource Costing & Accounting 14,
no. 1 (2010): 6-27; and H. Dane-Nielsen and C. Nielsen,
“Understanding Business Models from an Intellectual
Capital Perspective,” in “Handbook of Intellectual Capital
Research,” ed. J. Guthrie, F. Ricceri, J. Dumay, and
C. Nielsen (London: Routledge, 2017).
2. This is an example of the type of complementary fit,
where activities are mutually reinforcing, identified by
C. Zott and R. Amit in “The Business Model: A Theoreti-
cally Anchored Robust Construct for Strategic Analysis,”
Strategic Organization 11, no. 4 (November 2013):
403-411. See also P. Milgrom and J. Roberts, “Comple-
mentarities and Fit Strategy, Structure, and Organizational
Change in Manufacturing,” Journal of Accounting and
Economics 19, no. 2-3 (March-May 1995): 179-208.
According to Milgrom and Roberts, activities are comple-
ments when the marginal value of one activity increases
as the other activity is increased.
3. See Y. Taran, C. Nielsen, M. Montemari, P. Thomsen,
and F. Paolone, “Business Model Configurations: A Five-V
Framework to Map Out Potential Innovation Routes,” Eu-
ropean Journal of Innovation Management 19, no. 4 (2016):
492-527; and H. W. Chesbrough, “Open Innovation: The
New Imperative for Creating and Profiting from Technol-
ogy” (Boston: Harvard Business School Press, 2005).
4. This is an English translation of the company’s name,
Relationsfabrikken ApS. See www.relationsfabrikken.dk.
5. A. Osterwalder, Y. Pigneur, G. Bernarda, and A. Smith,
“Value Proposition Design: How to Create Products and
Services Customers Want” (New York: John Wiley &
Sons, 2014).
i. C. Baden-Fuller and M.S. Morgan, “Business Models
as Models,” Long Range Planning 43, no. 2 -3 (April-June
2010): 156-171.
ii. Taran et al., “Business Model Configurations: A Five-V
Framework.”
Reprint 59206.
Copyright © Massachusetts Institute of Technology, 2018.
All rights reserved.
Reproduced with permission of copyright owner. Further reproduction
prohibited without permission.
- 59206c
Winter 2018 Issue
Building Scalable Business Models
Building Scalable Business Models
About the Research
Accelerating Returns to Scale
Scalability Patterns in Business Models
A Road Map to Business Model Scalability
About the Authors
References
- boilerplate
Winter 2018 Issue
What to Expect From Agile
What to Expect From Agile
About the Research
Why ING Adopted Agile
Lessons From ING
About the Author
References
2/12/2020
Business Model Innovation Proposal Scoring Guide
https://courserooma.capella.edu/bbcswebdav/institution/BMGT/BMGT8132/190700/Scoring_Guides/u05a1_scoring_guide.html 1/1
Business Model Innovation Proposal Scoring Guide
Due Date: End of Unit 5
Percentage of Course Grade: 25%.
CRITERIA NON-PERFORMANCE BASIC PROFICIENT DISTINGUISHED
Assess the impact
of strategic
assumptions and
trends on the
development of a
business model
innovation.
33%
Does not
analyze strategic
assumptions or
trends. Does not
explain how to
mitigate the
limitations of
strategic
assumptions in a
business model
innovation.
Analyzes some of
the underlying
foundational trends
and their impact on
the development of a
business model
innovation. Identifies
some of the related
risks and
opportunities based
on the assumptions
and trends.
Assesses underlying
assumptions and
foundational trends
and their impact on
the development of a
business model
innovation. Identifies
some of the related
risks and
opportunities based
on the assumptions
and trends.
Comprehensively assesses
underlying assumptions and
foundational trends and their
impact on the development of
a business model innovation.
Identifies the related risks
and opportunities based on
the assumptions and trends.
Create a business
model innovation for
a selected
organization.
33%
Does not
integrate
theories,
models, and
processes of a
business model
innovation. Does
not define all
critical elements
necessary for a
complete
business model
innovation.
Creates some parts
of a business model
innovation. Defines
some critical
elements including
essential drivers.
Explains how some
elements of the
model are
innovative.
Creates a business
model innovation.
Defines critical
elements, including
essential drivers.
Explains how the
model is innovative.
Evaluates the impact
of the model on the
prospective
organization.
Creates a comprehensive
business model innovation.
Defines critical elements
including essential drivers.
Explains how the model is
innovative; clearly defines the
opportunities. Evaluates the
impact of the model on the
prospective organization and
integrates theoretical support
for the model.
Communicate in a
scholarly and
professional
manner.
34%
Neither
communicates in
a manner
expected of
doctoral-level
composition nor
exhibits critical
thinking skills:
grammar,
punctuation,
mechanics, APA
style and
formatting.
Communicates at a
basic level in a
manner expected of
doctoral-level
composition, and
exhibits some critical
thinking skills.
Communicates in a
manner expected of
doctoral-level
composition, and
exhibits critical
thinking skills.
Communicates exceptionally
well in a manner expected of
a doctoral-level composition,
and exhibits exceptional
critical thinking skills.
Long Range Planning 43 (2010) 156e171 http://www.elsevier.com/locate/lrp
Business Models as Models
Charles Baden-Fuller and Mary S. Morgan
Drawing on research undertaken in the history and philosophy of science, with particular
reference to the extensive literature which discusses the use of models in biology and
economics, we explore the question ‘Are Business Models useful?’ We point out that they
act as various forms of model: to provide means to describe and classify businesses; to
operate as sites for scientific investigation; and to act as recipes for creative managers. We
argue that studying business models as models is rewarding in that it enables us to see
how they embody multiple and mediating roles. We illustrate our ideas with reference to
practices in the real world and to academic analyses, especially in this Long Range Planning
Special Issue on Business Models.
� 2010 Elsevier Ltd. All rights reserved.
Introduction
Does the idea of business models matter? The term has become widely used in board rooms, by
managers in organisations, by consultants, by commentators of business, and even on radio and
television programmes aimed at the general public. Indeed, it is more widely used nowadays
than almost any other concept in strategy: when people are asked ‘what is strategy’? most give
an answer that includes the words business model. The ubiquity of the term and the plethora of
its uses suggest that business models are profoundly important to the world of work e yet man-
agement academics rarely put the concept centre stage, preferring their established stresses on
such concepts as competitive advantage, core capabilities, routines and resources. Public perception
of its usefulness seems to fly against this academic reluctance (in main-stream journals and texts) to
acknowledge the term, its uses and its consequences.
This article suggests answers to the questions ‘Why is the concept of business models useful’? and
‘Who uses them, for what, and how?’ We have sought answers that take seriously the ways in which
business models function as models in various different forms, and brought into the management
field insights drawn from writing and first hand research by historians and philosophers of science
who have probed how models are used in disciplines beyond the management arena. Models, mod-
elling and their discussion have a long history – particularly in biology and economics – that
0024-6301/$ – see front matter � 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.lrp.2010.02.005
http://www.elsevier.com/locate/lrp
pre-dates the arrival of the business model concept in management thinking. We mobilize our
thoughts in three sections:
� The first compares scale models and role models to explain how the notion of business models
enables us to classify businesses in a taxonomy or a typology. Although management scholars
have long sought to classify their world, we argue that using the business model notion – and
business models themselves – as classifying devices provide valuable ways to expand our under-
standing of business phenomena and the development of ideal types.
� The second section compares business models with the model organisms of biology and the
mathematical models of economics to show how business models form instruments of scientific
enquiry. This section is more strikingly novel to management academics, for it looks at the
biology analogy in a new light: not that of an evolutionary theory of the firm (e.g. Nelson
and Winter), but of the use of the methodology of the life sciences.1
� The third section suggests that specific business models function like recipes: as practical models
of technology that are ready for copying, but also open for variation and innovation. Here we
move back to a more comfortable arena for management scholar-teacher-practitioners, but
also one that opens up perspectives for further development.
Taken together, these three sections reveal how models, and modelling generally, and the use of
business models in particular, already play a central role in progressing management thinking.
Business models as descriptions of ‘kinds’ in a taxonomy
One role of business models is to provide a set of generic level descriptors of how a firm orga-
nises itself to create and distribute value in a profitable manner. This definition is manifest in
many different ways and forms, and Table 1 shows a few examples of how writers is this issue
approach business model definition.2 The table also provides a column showing how these
writers make use of the many different notions of ‘model’ we discuss and analyse in this article.
These (and, of course, many other) articles share a common feature ethey describe typical kinds
of organisations and behaviours by firms (or perhaps units within multi-business firms) in such
a way that we can label different kinds of behaviour and then classify individual firms accord-
ingly. Thus, the general idea of business models is intimately linked with notions of taxonomies
and ‘kinds’.
When business models come up in business discussions, they are often linked with the names of
firms, each understood to epitomise a particular form of behaviour. These are existing firms, whose
behaviour has been observed and is often given in a ‘nutshell’ description alongside their name.
Some prefer the use of the name alone – the ‘McDonalds business model’ or the ‘South West Air-
lines business model’; others prefer the counterpart brief description – ‘the franchising model’ or
the ‘low cost airline model’, because it is the real business example. This naming and labelling in-
vokes two different ideas of models that have the long-standing, common, senses of scale models,
and role models. Scale models offer representations or short-hand descriptions of things that are in
the world, while role models offer ideal cases to be admired – in these respects at least, the notion of
business models resonates with our experience of models, from the arts and sciences to ordinary,
everyday life.
A replica scale model of a tractor or a fire engine is a scaled-down version of a real thing, cap-
turing only certain details of its style or mechanism; a model ship in a bottle has a similar character.
They are small, simplified, and only describe some aspects of the real object: they might be de-
scribed as ‘nutshell’ models, for it is not just an issue of scale, but of picking out the elements
that seem most important to represent the object being modelled. Such models are very different
from the role of a Chanel dress as a model for the mass market to copy, or Beckham’s legendary
ability to ‘bend’ the flight of a ball acting as a ‘role’ model for young soccer players. These models
do not offer scaled-down versions or generic descriptions: they are what they are, and play only an
exemplary role. Thus, scale models are copies of things; role models are models to be copied. In busi-
ness models, the two notions come together: the organisations named above and in Table 1 have
Long Range Planning, vol 43 2010 157
Table 1. What is a business model?
Authors Definition Focus of analysis includes Notion of Model Examples include
Teece How a firm delivers value to customers
and converts payment into profits
Situates the business model concept.
Relates business model innovation
to technical innovation.
Kinds and Types;
Role Models
Swift meat packers, Sea Land
containers, Netflix online DVD rental
Zott & Amit . a system of interdependent
activities that transcends the
focal firm and spans its boundaries.
Emphasizes interdependencies beyond
firm boundaries. Good design
requires: Content (what), Structure (links)
and Governance (who does what).
Kinds and Types Ebay, Inditex (Zara), First Data corp,
FriCSo (start up in lubrication)
Williamson . cost innovation business model offers
advantages in radically new ways
meaning more for less.
How low cost business models
from China (and India) work.
Role Models to
follow
Shanghai Zhenhua Port
Machinery, Haier refrigeration,
Nano car- Tata
Gambardella
& McGahan
Business model is a mechanism
for turning ideas into revenue at
reasonable cost
Business model innovation
in high technology sectors that allows
small firms to capitalise on their ideas.
Scale Models
or short-hand
descriptions
Many references including
Google, Apple, Ideo, Yogitech +
biotech start-ups
Itami &
Noshino
. business model is a profit
model, a business delivery
system and a learning system
Puts learning centre stage,
classification by firm systems
Role Models and
Model Organisms
Toyota and
Google
Yunus,
Moingeon &
Lehmann-
Ortega
A value system plus a value constellation A social business model that lies
between for profit and charity
Role Models Grameen Bank + Telenor,
Veoila and Danone collaborations
Casadesus &
Ricart
The logic of the firm, the way it operates
and how it creates value for its stakeholder
Interfaces between business model,
strategy and tactics
Models capable of
manipulation
Ryan Air
Telmore/TDC
Demil &
Lecoq
The way activities and resources are used to
ensure sustainability and growth
Dynamics of business model
change over time
Model Organisms Arsenal FC
Sabatier,
Rousselle &
Mangematin
Cross roads of competence and
consumer needs
Portfolios of business models Recipes French biotech firms
Sources: See text.
1
5
8
B
u
sin
ess
M
o
d
els
a
s
M
o
d
els
exemplary status: real examples which give life to the short-hand descriptions – as Google is to the
internet business model.
scale models are copies of things; role models are models to be copied.
In business models, the two notions come together
We leave go of the exemplary notion of model for the moment and its possibilities for copying (al-
though we come back to it later) to explore how models understood as scaled down short-hand ac-
counts lead to descriptions of kinds: taxonomy and classification. The real world of firms is made
up of very many enterprises that behave and are organised in very different, individualistic ways. In
contrast, theories of firm behaviour tend to be very general, such as the economists’ theory that firms
act as if they aim to maximise profits, or the institutional theory in management that firms mimic other
firms to gain legitimacy (even though this may not maximise their profits).3 Business models operate
at an intermediate level between these two poles. Management scholars generate descriptions of firm
behaviours that capture their salient features: like scale models, these business model descriptions are
neither so general that they fail to distinguish the main differences between firms, nor are they so ab-
solutely particular that they cover every last detail of contract and activity. Scholars recognise that
firms e for all sorts of reasons – do not all behave the same: but nor are they all completely different,
for if they were, every firm would appear to have a different business model. This ‘in-between’ quality is
the first sense of what we mean by a ‘generic level’, but it is intimately linked with the second sense that
lurks in the idea of business models – that there are generic kinds of behaviour which are distinctly dif-
ferent. And it is these generic kinds of behaviour – that form the set of known business models at any
point in time – that enable scholars to classify individual firms that they study into groups according to
those described kinds. So, this classificatory function of the business model concept depends on these
short-hand descriptions, these scale-models.
The virtues of descriptions at a level that characterise and label ‘kinds’, and so enable us to clas-
sify further individual observed examples into one of those kinds, is most evident in the field of
biology. Knowing that something is an animal is often not very helpful, as we usually need to
know what kind of animal it is. We can describe the characteristic differences between insects
and mammals – taken as a whole – and make those descriptions useful for classifying things
from the living world into these (and other) natural kinds. We can go down a level of detail and
still this relationship – between description of kinds and classification – works well to sort spiders
from flies, distinguish mosquitoes from houseflies, and recognise the difference between the sting-
ing wasp and the benign hover fly. And while biologists who work on fruit flies do – for certain
purposes – want to sort their specimens by eye colour or genetic detail, for other purposes such
a highly detailed level of description is not needed. Different dimensions and levels of description
serve different purposes; but the notion of ‘kinds’ is critical to the successful characterization of sim-
ilarity and the definition of difference. Like the kinds of natural history, the role of business models
as descriptors supports a classificatory function to distinguish and sort firms, because the descrip-
tions they generate reveal kinds of business behaviour. This points us to the other sense of generic
that is relevant here – as referring to ‘genera’ or classes: to ‘kinds’ of things.
This root notion of generic is nicely compatible with how economic historians have described
and categorized the cohorts of firms that characterised the new ways of organising economic ac-
tivity that marked particular historical eras (as illustrated in Table 2). Interestingly, these are not
modern labels, but the contemporary labels given by the actual participants in those economies,
suggesting that the notion of business model (if not its label) has long antecedents. In mediaeval
times, goods were manufactured by members of guilds: the business model was one of single
workshops, small-scale production, of craft skills used to produce single item goods with
guaranteed-quality outputs and high value-added per piece. The first industrial revolution in
the late 18th and early 19th centuries saw the development of the ‘factory system’ in Europe.
Long Range Planning, vol 43 2010 159
Table 2. Business Models from Economic History
Cohort label (and arrival) Examples
Guild system (mediaeval) Goldsmith’s workshop
Factory system (18th/19th centuries) Textiles factory with automatic loom & Spinning Jenny
American system of manufactures (19th/20th centuries) Model-T Ford production line system;
Network firms (20th/21st centuries) Bennetton; Nike;
Chinese low cost (21st century) Shanghai Zhenzua port machinery company
In this new business model, firms arranged their innovative manufacturing processes inside fac-
tories, with division and specialisation of labour, and with mass production but of a heteroge-
neous collection of goods (such as a variety of textiles) with low costs and low prices. (Such
changes, as for other revolutions in business models, typically came with different learning sys-
tems and different inter-firm relations.) While the innovators of the guild system are surely lost
in the mists of time, we know quite a lot about the innovators of the factory system, for they
built ‘model factories’ in ‘model communities’ (such as the textile mills and associated settle-
ments of New Lanark in the UK and Lowell in the USA) that offered a new formula for firm
success that others flooded to copy. In the second industrial revolution of the late 19th/early
20th century, the ‘American system of manufactures’ replaced scarce labour with extensive cap-
ital in the form of machines (such as the Ford moving production line) that made homogeneous
goods, at low cost for the mass consumer (Singer sewing machines as well as Model T Fords).4
Arguably another industrial revolution is underway now, in the ‘Chinese system of manufactur-
ing’ – Williamson alerts us (again in this issue) to a new breed of emerging market players who
have moved from applying their labour cost advantage to technologically backward processes,
towards a new business model offering much higher technology at low cost, coupled with un-
matched choice of products. Citing its use in exemplar firms such as Haier (white goods) and
Shanghai Zhenzua (port machinery), he warns this new base of competition in manufacturing
will leave few places for more traditional rivals to hide.5
Of course many other business model taxonomies could be constructed – indeed, each busi-
ness model definition will focus on different characteristics and so is likely to produce a different
set of classes and so possibilities for classification (as we can see in Table 1). For those concerned
with taxonomy in management – as in biology – there is no fixed number of labelled boxes,
rather a set of kinds which may grow or change over time as ideas and knowledge about things
in the world develop. For example, the models of industrial economics developed in the early
half of the last century characterised types of firms according to their number in an industry
and their competitive behaviour on the basis of pricing, whereas now (according to game the-
ory) industrial behaviour is more likely to be characterised by a firm’s strategic possibilities and
choices, which provides quite a different taxonomy.6 Each different way of sorting – based on
new ideas, new empirics, or even new business experiences – may reveal different aspects to
be of importance and so different elements to be analysed, just as Darwin’s tree of life revealed
different connections and was used for different purposes to our modern genetic tree of life. In-
deed, the current debates amongst biologists and philosophers about the implications of the rev-
olution in genetic information hinge on rethinking the kinds of things that there are in the
world, and how they relate to each other.7
different ways of sorting [firms]- based on new ideas, new empirics, or
new business experiences [mean] different aspects [become] important
so different elements have to be analysed
160 Business Models as Models
Building a taxonomy of business-model classes is not a straightforward task (as Lambert shows
for e-business models), and nor is the subsequent process of classifying businesses into those classes.
These projects, and their problems, have been well rehearsed in earlier literatures in management, as
they have in other fields in which taxonomy and classifications are dominant activities.8 They are
worthwhile activities however, for the possibilities they give us for not only defining but also for
exploring characteristic similarities and differences and the relationships between classes, as well
as for developing understanding, explanation, prediction and intervention. As both Crombie and
Hacking note, taxonomy is one of the classic means of acquiring scientific knowledge.9 But while
it is of course very useful to be able to recognise different kinds of firm behaviour, and be able to
classify or sort firms into those different generic types, some further way of characterising business
models as models is needed in order to understand the many other roles they can e and do e play,
both for academics and for managers.
This brings us to a broader question about what sort of things business models are. It may help
here to begin here with the difference between taxonomy and typology as a preliminary to under-
standing the difference between kinds and types. The usual way to differentiate them is to think
of a taxonomy as being the classes (or kinds) of things observed in the world, and as being devel-
oped from empirical work, bottom up. A typology is usually understood as delineating types of
things (or events) where the types are decided theoretically or conceptually by the scientist, top
down (see Table 3).10
However, Max Weber’s ‘ideal types’ – a highly influential notion in modern social sciences – are
a bit of both. For Weber, ideal types are generalisations constructed from the facts of experience, yet
they create abstract concepts that he described as ‘pure fictions’. So ideal refers here not to the no-
tion of perfection, but to the adjectival form of ‘idea’ – and type refers not to a classificatory kind we
meet in the world, but to a ‘mental construct’. The ‘ideal type’ notion is powerfully useful because,
as he explained, it mediates between our ideas and theories on the one hand, and the things in the
world we want to describe and explain in immediately practical ways:
The ideal type concept will help to develop our skill in imputation in research: it is no ‘hypothesis’
but it offers guidance to the construction of hypotheses. It is not a description of reality but it aims to
give unambiguous means of expression to such a description.11
This notion of ideal types and typologies fits particularly neatly into the management literature, for
we can go back to some classic examples in the history of the field that have particular relevance to this
discussion of business models. The 1960s Aston Studies programme, led by Derek Pugh, developed
labels and accounts of types of organisational behaviour (rather than of business models).12 His re-
search process involved empirical description and measurement along various broad dimensional cat-
egories of organisational behaviour, descriptive statistical work to abstract patterns of those particular
Table 3. Taxonomies, Typologies and
Ideal Types
Taxonomy Typology
Kinds (taxa) defined bottom-up
through observation & empirical work
Types derived top-down through conceptual
and theoretical work
Kinds e used to classify firms Types e used to classify firms
Ideal Types
Types derived from statistical measurement and analysis of firm characteristics
(e.g. Pugh and the Aston Project)
Types derived from exemplary cases and their analysis as models
(e.g. Business Models)
Long Range Planning, vol 43 2010 161
characteristics from the mass of those observations, and analytical statistical work to draw out the con-
nections between these patterns, from which he conceptualised and labelled characteristic types of or-
ganisations. This sounds very Weberian in its combination of empirical analysis of kinds turning into
conceptual ideal types, and of taxonomic work leading to a typology, and indeed Pugh related his work
directly to Weber’s mode of research and substantive work on organisations.
Business models have the characteristics and fulfil the roles of ideal
types: they are based on both observation and theorizing. But what
empirical and conceptual scientific work goes into establishing them?
Business models, too, might be understood as ideal types, for they seem to have the character-
istics and fulfil the roles that Weber associated with such types: they are based on both observation
and theorizing. But if so, what kind of scientific work – empirical and conceptual – goes into estab-
lishing business models? They are certainly not isolated by inference from any large statistical study,
as Pugh’s were: instead we argue that business models are produced by model work: that is, scholars
investigate, with some considerable depth of scientific research, particular examples that form our
set of business model exemplar cases. These scientific enquiries by management scholars provide an
empirically and conceptually grounded account of each case to establish the full portraits associated
with their ideal types, to accompany the shorthand (nutshell) descriptions by which they are known
(the scale model). This is what we mean by ‘model work’, a term that relies on the notion of sci-
entific models, and the way models are used in the sciences. This mode of research contrasts with
Pugh’s process of data collection, extraction of patterns, correlation of patterns, and attribution of
labels. His statistical work to construct a typology of organisations is replaced in the business model
literature with model work in the construction of a typology of business models (see again Table 3).
But, so far, we do not have enough explanation of what is involved in scientific research with
models to support the claim that it is this kind of work which turns particular cases and short-
hand business model descriptions into something as rich and as useful as an ‘ideal type’.13
Business models as model organisms for investigation
So we turn our attention to consider what kind of a scientific model a business model is, and what
kind of work is done with it. It is not always obvious why a particular kind of business model is
successful. For example, what elements are the real keys to the success of South West’s low cost
airline model or Google’s internet model, which details have to be exactly so to make it work, and
which are irrelevant and just happen to be present in the particular firm that is studied, rather
than true of all firms of that type?14 Recent commentaries from the history and philosophy of
science on the many kinds of models that inhabit the sciences, and on the ways models are
used by scientists and for what purposes, throw some interesting light on these questions.15 In
both biology and economics, as in management, models are used to address and help solve
one basic problem – lack of knowledge. All three fields have grand theories, and lots of detailed
studies, but sometimes lack a way to fit general ideas to the descriptions of events and objects of
life in order to understand them. This is where models come in. Economic models are usually
mathematical objects (often quite small) which are taken to represent various relationships in
the economy as a whole, or the economic behaviour of firms or people. In biology we also
find a different kind of model, the so-called ‘model organism’: real life objects such as the fruit
fly, the laboratory mouse, the zebrafish, the C. elegans worm, the Arabidopsis plant, and so forth,
chosen to represent different kinds of life.16 These two very different kinds of models nevertheless
function for those sciences in rather similar ways, ways which may illuminate the use of business
models in management science.
162 Business Models as Models
The economist and the biologist both use their models as valuable and sophisticated instruments
to enable them to gain more knowledge about their worlds. In both fields, models need to be in-
vestigated to provide a full understanding of how the model works and to know and understand its
qualities. These investigations involve various forms of manipulation or experiment. Economists
experiment with mathematical models to learn about the behaviour of the made-up world repre-
sented in their model, to analyse its properties and to see what limitations if offers. They experiment
by varying elements in the model in response to different ‘what if’ questions that come from their
theories or from real world events (What pricing rules should monopolies follow? What should
a government’s reactions be to a financial crisis, or a firm’s to doubled oil prices? How would con-
sumers’ behaviour change if they paid for carbon usage?) and then reasoning mathematically with
their model to come up with their answers.
Similarly, biologists experiment with their model organisms to learn how they work, but here the
experiments are ‘real’ laboratory experiments. By intensive study of a few kinds of organism (a
worm, a fish, a plant, a yeast, a mammal, an insect, etc.) the community of biologists study how
life is lived in these different forms. They learn what behaviour is specific to each form, and
what is general and shared between them, which processes and elements can usefully be compared
and which not, and what makes them special and what does not.17 For both groups of scientists,
models are the place where they figure out how their particular kinds of ‘things’ of the world
work. They check these model findings against their theories, and also against behaviour in the
world, to see how far the findings match the characteristics of the real world that their models pur-
port to represent. Research via their models can yield insights into the grand theories, or the small-
est details of behaviour, or help develop ideas about mechanisms that operate at some middle level.
For both economists and biologists, the model object must be manipulable, or experimentable e
for models must offer the kinds of descriptions that can be reasoned with, the kind of resources
that can be investigated to answer questions (as Morgan explains in detail).18
When we look carefully at how business models are used by their communities, we find a variety
of activities going on which we suggest makes them more similar to the model organisms of biology
than to the mathematical models of economists. We have already seen how the academic uses busi-
ness models to describe and give labels to how firms operate in various different generic ways, and
then to classify firms according to which kind of business model they employ. But we also want to
know why and how each model is successful as a business, why it is profitable. At that point, the
particular business models we study take on aspects of the model organisms of biology. Indeed, one
could argue that the exemplar case business models (such as McDonalds) are to management what
the model organisms are to biology: real-life examples to study.19
exemplar case business models (like McDonalds) are to management
what model organisms are to biology: real-life examples to study
But biologists also use model organisms to learn about life more generally. For them, the model they
investigate is not just any mouse: it is ‘the lab. Mouse’ – a particular strain bred to a standardized form,
and then investigated in exhaustive detail, by many different teams and methods, to ask and answer
many different questions about that life form. But biologists also use a model organism to make in-
ferences about other life in the same class, and in the more general class. Thus lab. mice are not just
representative of mice, but also representative for their general class: mammals. The difference between
‘of’ and ‘for’ is relevant for our story.20 Since a model organism acts as a type representative for the
bigger, general class/kind of which it is a member – lab. mice stand in for mammals, zebrafish for
fish, fruit flies for insects, etc. – investigating any one of these particular representatives provides in-
formation that may be relevant for the wider class. The same process of inference from the individual
exemplar to the wider class goes on in business model research, which is why our opening discussion of
taxonomy and of the classifying function of business models was so important.
Long Range Planning, vol 43 2010 163
In an analogical sense, a high street McDonalds can be thought of as a lab. mouse – as a standard-
ized representative of McDonalds as a company. But also McDonalds (as a business) may be taken
as a representative for a genre of firms that practice a similar kind of business model – ‘business
format franchising’ – where a company designs a system to deliver a product/service (as McDonalds
delivers hamburgers) and offers knowledge of the system on a fee-related-to-success basis. Business
format franchising has become ubiquitous in food outlets, hotels, coffee bars, and in many
consumer and small business services. And, while each business format franchise system is different,
McDonalds remains the benchmark to which people refer, either centrally or tangentially, when
analysing this particular business model: it is the model for business format franchising.
In the same way as biologists focus their study on a set of model organisms, business scholars
repeatedly study the same organisations: South-West Airlines, Google, Disney, Toyota etc., to
understand exactly how that kind of business model works, both in theory and in practice. This
intensity of study creates a depth of understanding and provides an analytical account of each ex-
emplar case, involving theorizing, concept formation, and a fully developed appreciation of its prac-
tical details. It is this kind of model work, and the knowledge it produces, that turns the example
into the exemplar case – something like an ideal type. It is these firms – a widely recognised set, often
part of the teaching curriculum as well as the research laboratory – that form the model organisms
of management. Each firm is studied not just for its own sake as an exemplar, but as the ‘type’
against which other firms following the same generic business model can be measured and com-
pared.21 And of course, each exemplar can also be contrasted with firms practising a different
model, i.e. members of a different class.
Thus, business models form the ‘stuff’ of many different kinds of enquiry, by both academics and
firm participants, and these model investigations into business models take a number of forms.
Some use a schema, or a mathematical model, which can be analysed and investigated. Others
use the firm itself e the model organism. Both sorts of models of the firm – the first-hand real or-
ganism and the various kinds of second-hand accounts of it – can be investigated to learn about the
business model. For example, the academics’ Casadesus and Ricart build a representation of Rya-
nair’s business model, identifying inter-relationships and causal ‘feedback loops’ between particular
aspects of its choices and consequences.22 In contrast, business men and women use their own firm
as their model for experimentation, to consider how changing the way its business model is orga-
nized or competes can influence its possibility of success, as Magretta was among the first to
record.23
Of course thought experiments or simulations and other business model manipulations are only
possible when the model is (like those of economics) simple enough to work through (or where the
implications of a likely change can be programmed into it), but yet complicated enough to capture
sufficient content of the firm’s arrangements to make the experiment meaningful. For investigations
into the exemplar cases, management academics gain some of the advantages of complexity and real-
ism of real life firms, without of necessity, having a full account of everything involved in the specific
firm. Here is where in-depth case study investigations of the exemplary business are so valuable.24 For
the managers’ real-world firm experiments, the business model is more like the biological model or-
ganism – an incredibly complicated set of arrangements where every slight change in one bit is likely to
alter all the other relationships. Here e as with biologists – managers experimenting with the business
model are undertaking a real life experiment subject to all the unknowns that involves.
Table 4 shows some of the ways in which such experiments have broadened and deepened our
understanding of business models. The accounts provided in this issue show that some of this work
is via thought experiments, some via experiments on schematic models, and some involves man-
agers experimenting on their firms in the real world. And some experiments take place in the con-
text of transforming an existing business, while for others the context is one of exploring to build
a new business.25
The most important difference from both economics and biology occurs when managers exper-
iment on their own firm, for they know lots about the elements and relations involved because they
are part of it. Managers have tacit ‘insider’ knowledge that the academic does not have, and which
164 Business Models as Models
Table 4. Examples of Business Model Experimentation
Author Company examples Kinds of experimentation
Sosna, Trevinyo-
Rodriguez & Velamuri
Naturhouse Deliberate real experiments by
managers
with new business model to change business
Svejenova, Planellas &
Vives
Ferran Adrià &
elBulli restaurant
Deliberate real experiments by the
entrepreneur to create new businesses models
McGrath Freemium models,
Google
Deliberate real experiments by managers to
embed business models into the firm
Doz & Kosonen Mental models of
managers
Thought experiments by managers to create new
business models for existing businesses
Chesborough 3Com, Radiohead Experiments by managers that were partly planned
and partly not, partly schema and partly real firm based
Dahan, Doh,
Oetzel & Yaziji
Corporate/NGO
Collaborations
Experiments by managers on different NGO
collaborations to develop social business models
Wirtz, Schilke &
Ullrich
Web 2.0 BMs:
Wikipedia, MySpace
Thought experiments by academics linking Web 2.0
phenomena to changes in internet firms’ business models
Thompson & MacMillan New businesses for
social wealth creation
Thought experiments by academics and real project
experiments to create business models for
new & societal wealth markets
Smith, Binns & Tushman USA Today, analogue
devices
Experiments by managers and academics in
balancing exploitation and exploration
may not be part of any business model account or description. This inside knowledge is surely the
most unusual thing about business models as models, and what distinguishes them from the models
of other scientific disciplines: that the subject of the model or experiment – the firm or business and
its people – is a knowing part of the model, and of experiments with it. This makes business models
performative in a particularly reflexive way.26 The experiments by these managers are on their own
firm and involve their own behaviour. For them, and for the people in the firm, their business
model is not just a description of how they go on, but offers a model in the ideal sense, in depicting
how they want to be in the future, a model to strive for, an ideal outcome. The specific business
model a firm adopts offers a point of identification which may be essential to rally its participants,
particularly if radical change in the model is planned. After all, such experiments amount to chang-
ing the model organism – something not to be undertaken lightly.27
Business models as recipes
The experiences of managers point us to an essential element of business models as models – that
they are practical things and have a dynamic aspect to them: as Demil and Lecoq explain, firms
experiment, change, refine and re-invent their business models.28 This introduces one more notion
of models that we think is important, and which comes from the practical and technological do-
main rather than the scientific one. Architects’ construction models have been used for centuries,
not just to persuade donors to fund construction, nor only to specify aspects of the building con-
tract, but in many cases (as the records of St. Paul’s Cathedral show) to illustrate salient details of
radically new construction techniques to carpenters and masons.29 This notion of a model as some-
thing that demonstrates a technology (rather than as a technology of scientific investigation, as con-
sidered in the previous section), is particularly interesting, as such models often display or
instantiate matters of principle (how joists are to be joined to support a roof) as well as details
Long Range Planning, vol 43 2010 165
of style and content (exact arrangements, decorations, and so forth). They are used to demonstrate
or give advice about how to do something so that the results will come out right. There is no par-
ticular name already given for such models, but they can be well conceived of as recipes: they em-
body some general principles (of cooking: baking, roasting, frying etc and cooking times and
temperature, etc.) as well as particular details of the ingredients and their assembly for specific
dishes.30 They lie between principles – general theory – and templates – exact and exhaustive rules
(as discussed in Winter and Baden-Fuller’s article on replication referenced earlier). Recipes depend
(in a parallel manner to architects’ models) on considerable tacit knowledge of the craft of cookery,
and on how they represent that knowledge, to make them usable.
Models are used to demonstrate a technology. [like recipes] they give
advice about how to do something so the results come out right
As with recipes, business models provide managers and scholars a way to describe and distinguish
the variety of types of business behaviour we find in the world of firms, and to outline how the
exemplar cases provided by certain famous examples fit in. Ideal-type business model examples
provide recipes that have been already tried and tested in the world, ideals that other firms may
aim to follow, and on which they may make more or less minor variations without changing the
basic recipe for success. While businesses (or units) may copy other firms by following either prin-
ciples or templates, business models – understood as recipes – offer another way to copy. But they
also suggest that there is no one way by which a business can make money, but many generic types,
and many possible variations within each.
Of course, recipes require ingredients. In the case of business models, these are a variety of stra-
tegic elements – resources, capabilities, products, customers, technologies, markets and so forth.
But, business models cannot just be defined as the set of elements – to do so would be to ignore
the fact that business models function as the recipes that draw the elements together and ‘cook’
them – arrange and combine them in ways (old and new) through which firms may be successful
or not. The recipe notion includes therefore both the organisation and integration of the main el-
ements of the firm’s activity, and provides a set of rules that, if followed, can be expected to produce
a particular kind of outcome. Of course, recipes work on the basis of given technologies and ingre-
dients, which may only have value for that particular recipe and dish. Changing the recipe – or,
more radically, the dish – will change the value of the technology to the business model and its
ingredient/resource requirements.
Lest this all seems over-fanciful, we have in fact borrowed the notion of models as recipes from Bou-
mans’ (1999) account of the development of business-cycle models in economics as resembling the
development of cookery recipes. When looking at how economists build their models, Boumans says:
Each case . contains a new recipe that initiated a new direction in [business-cycle model] research,
but in each case the recipe was different. The integration of a new set of ingredients demands a new
recipe otherwise the result will fall apart. However, a recipe is not unique in the sense that it is the
one and only way to integrate a certain set of ingredients. Thus a new recipe is a manual for
a successful integration of a new set of ingredients.31
The idea of the recipe suggests how the chef, within broad constraints of the principles of cooking
and the kind of dish chosen, may create variations and innovations. If business models play the same
role, they too are not open ended but constrained, and involve ingredients that must be arranged and
combined according to the recipe (i.e., to some generic business model), but yet have many possibil-
ities for innovation. Just as the creative chef will innovate to produce a new recipe for a successful dish,
the creative entrepreneur or manager may innovate to build a new business model, a new recipe for
firm behaviour. To reinforce the point that e as in recipes e the possibility for innovation in business
166 Business Models as Models
models is one of their fundamental features, we point again to Table 2, where economic history dis-
plays deep and long run changes in the ‘standard’ business model of a period (and, indeed, the whole
notion of innovation in business models is taken up in several articles in this special issue). Innovation,
clearly, can take the form of variation to suit changing situations. Thus, a chef may cook several dishes
simultaneously, using different ingredients, for different parts of the meal: Mangematin cogently ar-
gues that managers may follow several recipes at once for different markets, or repeat the same recipe to
enter different markets.32 Or there may be new appetites to feed: Thompson and MacMillan, Yunus
et al. and Dahan et al. suggest new forms of business model collaborations to address the needs of
the world’s poorer societies.33
The notion of a business model as a recipe captures something quite essential about a firm’s behav-
iour. The concept ‘business model’ can be said to define the business’s characteristics and its activities
in a remarkably concise way, in other words, in a way that matches the generic level that defines a kind
or type of behaviour (neither too general nor too particular in its detail) but that also suggests why it
works, because it embodies the essential elements and how they are to be combined to make them
work. Of course, not all cooks can make all recipes work e and not all managers are equally proficient
at making a business model work. In this respect Spender’s 1980 thesis Industry Recipes considers iron
founders and dairy companies and explores what is needed to make their business recipes successful.
He notes that different combinations can create success, and that management and its attitude are key
parts of success.34 Porac, Thomas and Baden-Fuller, looking at the cognitive communities of Scottish
knitwear firms, also unpick the role of attitude and mind-set in the business model, and point to a small
group of like-minded firms successfully sharing a recipe by adopting a common mindset.35
not all cooks can make all recipes work e and different combinations
(ways to make and bake the cake) can create success
The analogical notion of business models as recipes, along with their associated exemplar real
cases for each business model type, also allows us to see why the conversation about business
models is so important in the real life of organisations. Just as the young footballer is inspired
to ‘Bend it like Beckham’, so TV presenters interrogate managers and entrepreneurs about their
business model, expecting answers that give a recipe, along with the label of the well known
company that gave its name to the exemplar. Likewise, managers (and even workers) can be
inspired to change behaviours with reference to the business model of an iconic and successful
company.
Although many claim that the term ‘business model’ only gained currency in the internet boom
years of the late 1990s, its modern public usages in fact mirror the interest shown in ‘model facto-
ries’, ‘model communities’ and ‘model farms’ at the turn of the 18th into the 19th century. In their
time, they were well-known exemplary cases, and visitors flocked to see the design and the working
of such business models: examples to be copied in more or less detail, with more or less variation,
but copied just because they instantiated the most perfect e the most up-to-date and innovative –
economic organisations of their day and kind.
Conclusions
Our discussions suggest that business models have a multivalent character as models. They can be
found as exemplar role models that might be copied, or presented as nutshell descriptions of a busi-
ness organisation: simplified, short-hand descriptions equivalent to scale models. We can think of
them not only as capturing the characteristics of observed kinds in the world (within a taxonomy),
but also as abstract ideal types (in a typology) in the sense Weber outlined. And when we do so, we
can see how this analysis of business models as models challenges the idea and ideal of any single, or
fixed, taxonomy or typology of business models. Rather, the developing analysis of business models
Long Range Planning, vol 43 2010 167
itself has prompted the expansion of taxonomies and typologies in ways which throw new light on
the nature and role of business models themselves.
Business models also function as models in the scientific sense. They can be investigated as model
organisms (as in biology) that stand in as representatives for a class of things. Or they may appear as
schemas in academic slides and as representations that can be manipulated like economic models,
where, like scientific models in many fields, they appear as generic in-between kinds-of-descriptions
that are neither general theory nor full empirical descriptions. And when we look carefully at these
very different kinds of scientific models, we see that they function as laboratories that enable the
scholar both to generate concepts and theories and to investigate empirical domains. Just as in other
fields of science e from biology to economics to physics – business models function as mediators to
enable users to figure out how their world works in the practical context, as well as in the
academic.36
Finally, we have explored the analogy of models as recipes to understand the role of variation and
innovation within the constraints of ingredients and purposes, and their use by managers to mo-
tivate strategy changes, and to experiment with their organisations.
We are not suggesting that business models are models in just one of these senses, or play just one
of these roles, because these senses and functions are not mutually exclusive. Business models are
not recipes or scientific models or scale and role models, but can play any – or all – of these different
roles for different firms and for different purposes: and will often play multiple roles at the same
time (as Table 1 shows). This explains not only why the idea of business models seems to be so
pervasive and yet also so challenging to grasp, but at the same time why the concept is so potentially
rewarding for the future of management research.
Business models are not recipes or scientific models or scale and role
models. they play any – or all – these roles, often at the same time
Acknowledgements
We were provoked to write this piece by Rob Grant’s challenge: ‘Why do we need the business
models concept? What use is it?’ We acknowledge support from the EPSRC (grant number EP/
E037208/1) on Financial and Organizational Innovation. We thank those who commented on
the original draft, especially historians and philosophers of science: Marcel Boumans, Sabina
Leonelli, Simona Valeriani; and management scholars: Sid Winter, Rob Grant, Giovanna Padula,
Rodolphe Durand, and Benoit Demil; all those who participated in the discussion at our presenta-
tion at the Cass International Workshop on Business Models in December 2009, and finally Jon
Morgan for his inspired editorial work.
References
1. See R. R. Nelson and S. G. Winter, An Evolutionary Theory of Economic Change, Cambridge MA,
Cambridge (1982).
2. Table 1 illustrates different definitions of ‘ business models’. For example, Teece’s definition that a business
model is the relationship between creating value for the customer and capturing value for the firm gen-
erates descriptions of firm behaviour couched in those terms; Itami and Nishino’s view that a business
model is the combination of a profit model, an activity system and a learning project generates firm de-
scriptions according to those characteristics, and both of these are more or less different from Zott and
Amit’s view that stresses inter-firm relationships and from Gambardella and McGahan’s, which concerns
innovation in value chain positioning. See D. J. Teece, Business Models, Business Strategy, and Innova-
tion, Long Range Planning 43(2e3), 172e194 (2010); H. Itami and K. Nishino, Killing two birds with
one stone: profit for now and learning for the future, Long Range Planning 43(2e3), 364e369 (2010);
C. Zott and R. Amit, Business model design: an activity system perspective, Long Range Planning
168 Business Models as Models
43(2e3), 216e226 (2010); A. Gambardella and A. M. McGahan, Business-model innovation: general pur-
pose technologies and their implications for industry architecture, Long Range Planning 43(2e3),
262e271 (2010).
3. P. J. DiMaggio and W. W. Powell, The iron cage revisited: institutional isomorphism and collective
rationality in organizational fields, American Sociological Review 48, 147e160 (1983).
4. See D. A. Hounshell, From the American System to Mass Production: 1800e1932, Johns Hopkins University
Press, Baltimore (1984).
5. P. J. Williamson, Cost innovation: preparing for a ‘value-for-money’ revolution, Long Range Planning,
43(2e3), 343e353 (2010).
6. See M. S. Morgan, The curious case of the prisoner’s dilemma: Model situation? Exemplary narrative? in
A. Creager, E. Lunbeck and M. Norton Wise (eds.), Science Without Laws: Model Systems, Cases, Exem-
plary Narratives, Duke University Press, Durham, NC, 157e185 (2007).
7. See for instance M. A. O’Malley, Construction and deconstruction: the influence of lateral gene transfer on
the evolution of the Tree of Life, in A. Oren and T. Papke (eds.), Molecular Phylogeny of Microorganisms, Ho-
rizon, Norwich (2010); and the report: Questioning the Tree of Life from the Philosophy of Science Association
meeting, (6e8 November 2008) see http://philsci.org/conferences/psa2008/2008-psa-program .
8. There have been a number of recent attempts to create taxonomies for e-business models and for a critical
survey, and references to prior work in taxonomy, see S. Lambert, Do We Need a ‘Real’ Taxonomy of
e-Business Models? School of Commerce Research Paper Series: 06e6 (ISSN: 1441e3906) from
http://www.flinders.edu.au/shadomx/apps/fms/fmsdownload.cfm?file_uuid¼FDBE4DE1-EB6B-7B71-0B
CE-8FC142552687&siteName¼sabs (2006). For classic studies from the philosophy and sociology of sci-
ence about taxonomy and its consequences in classification in the human realm, see I. Hacking, Working
in a new world: the taxonomic solution, in Paul Howich (ed.), World Changes: Thomas Kuhn and the Na-
ture of Science, MIT Press, Cambridge, Mass, 275e310 (1993); C. G. Hempel, Fundamentals of taxonomy,
and Typological methods in the natural and social sciences, both in Aspects of Scientific Explanation, Mac-
millan, New York, pp. 137e172 (1965); and C. G. Bowker and S. L. Star, Sorting Things Out: Classification
and its Consequences, MIT Press, Cambridge, Mass (2000).
9. A. C. Crombie, Designed in the mind: western visions of science, nature and humankind, History of
Science 26, 1e12 (1988); and I. Hacking, ‘Style’ for historians and philosophers, Studies in the History
and Philosophy of Science 23(1), 1e20 (1992).
10. Lambert S, (2006), op. cit. at Ref. 8 gives an extended version of top part of this table.
11. See M. Weber, Objectivity in social science and social policy (1904), in translation by E. A. Shils and H. A.
Finch (eds.), The Methodology of the Social Sciences, Free Press, New York, (1949) quote is from pp. 90e93.
For the relation of ideal types to models, see M. S. Morgan, Economic man as model man: ideal types,
idealization and caricatures, Journal of the History of Economic Thought 28(1), 1e27 (2006).
12. See particularly D. S. Pugh, D. J. Hickson and C. R. Hinings, An empirical taxonomy of structure of work
organizations, Administrative Science Quarterly 14, 115e126 (1969).
13. R. Amit and C. Zott use empirical material to explore the dimensions of business models, but not to con-
struct ideal types – see Value creation in e-business, Strategic Management Journal 22, 493e520 (2001).
14. This is explored at some length in S. G. Winter and G. Szulanski, Replication as strategy, Organization
Science 12, 730e743 (2001); and in S. G. Winter and C. Baden-Fuller, Replicating Organizational Knowl-
edge: Principles or Templates, Working Paper, Cass Business School, available on SSRN (2008).
15. Two recent sets of commentaries that cover models in natural and social sciences can be found at
A. Creager et al. (2007), op. cit. at Ref. 6; and M. Morgan and M. Morrison, Models as Mediators, Cam-
bridge Press, Cambridge, UK (1999).
16. Like economics, biology also has mathematical models, but we suggest that for management scholars it is
the model organisms that represent the useful analogy in this context.
17. For a classic history of a model organism that shows this experimental activity, see the account of the fruit
fly in R. E. Kohler, Lords of the Fly: Drosophila Genetics and the Experimental Life, University of Chicago
Press (1994); For a philosophical discussion of their comparative roles, see R. A. Ankeny, Model organ-
isms as cases: understanding the ‘Lingua Franca’ at the heart of the human genome project, Philosophy of
Science 68, S251eS261 (2001).
18. M. S. Morgan, Modelling as a Method of Enquiry (2009) to published as Chapter 1 of M. S. Morgan, The
World in the Model, Cambridge University Press (in press). The chapter is downloadable from http://
www.lse.ac.uk/collections/economicHistory/pdf/Morgan/Morgan%20Chap1%20Modelling%20as%20a%20
Method%20of%20Enquiry
Long Range Planning, vol 43 2010 169
http://philsci.org/conferences/psa2008/2008-psa-program
http://www.flinders.edu.au/shadomx/apps/fms/fmsdownload.cfm%3Ffile_uuid%3DFDBE4DE1-EB6B-7B71-0BCE-8FC142552687%26siteName%3Dsabs
http://www.flinders.edu.au/shadomx/apps/fms/fmsdownload.cfm%3Ffile_uuid%3DFDBE4DE1-EB6B-7B71-0BCE-8FC142552687%26siteName%3Dsabs
http://www.flinders.edu.au/shadomx/apps/fms/fmsdownload.cfm%3Ffile_uuid%3DFDBE4DE1-EB6B-7B71-0BCE-8FC142552687%26siteName%3Dsabs
http://www.flinders.edu.au/shadomx/apps/fms/fmsdownload.cfm%3Ffile_uuid%3DFDBE4DE1-EB6B-7B71-0BCE-8FC142552687%26siteName%3Dsabs
http://www.lse.ac.uk/collections/economicHistory/pdf/Morgan/Morgan%20Chap1%20Modelling%20as%20a%20Method%20of%20Enquiry
http://www.lse.ac.uk/collections/economicHistory/pdf/Morgan/Morgan%20Chap1%20Modelling%20as%20a%20Method%20of%20Enquiry
http://www.lse.ac.uk/collections/economicHistory/pdf/Morgan/Morgan%20Chap1%20Modelling%20as%20a%20Method%20of%20Enquiry
19. For commentaries on the similarities of research modes between exemplar cases and model organism re-
search, see A. Creager et al. (2007), op. cit. at Ref. 6.
20. M. S. Morgan, Experiments without material intervention: model experiments, virtual experiments and
virtually experiments, in H. Radder (ed.), The Philosophy of Scientific Experimentation, University of Pitts-
burgh Press, Pittsburg, 216e235 (2003).
21. The way in which a particular business case becomes an exemplary case is in part related to its role in teaching.
Some smaller set of all the case studies of firms are used again and again, to demonstrate substantive issues or
illustrate particular points. Because they are known the world over, such cases become ‘naturalised’ as the
exemplars of their kind of business model. (We thank Vincent Mangematin for this observation).
22. R. Casadesus-Masanell and J. E. Ricart, From strategy to business models and onto tactics, Long Range
Planning 43(2e3), 195e215 (2010).
23. J. Magretta, Why business models matter, Harvard Business Review 80(5), 86e92 (2002).
24. The model organism version – the real exemplar e maybe more informative just because it is the real thing
and there are always hidden aspects of the real thing which matter in an experimental framework, just as it
matters that the mouse is a real mouse. See for instance S. G. Winter and G. Szulanski (2001), and S. G.
Winter and C. Baden-Fuller (2008) op. cit. at Ref. 14; M. S. Morgan, (2003) op. cit. at Ref. 20; and M. S.
Morgan, Experiments versus models: new phenomena, inference and surprise, Journal of Economic
Methodology 12(2), 317e329 (2005).
25. See M. Sosna, R. N. Trevinyo-Rodrı́guez and S. R. Velamuri, Business models through trial and error: the
Naturhouse case, Long Range Planning 43(2e3), 383e407 (2010); S. Svejenova, M. Planellas and L. Vives,
An individual business model in the making: a chef’s quest for creative freedom, Long Range Planning
43(2e3), 408e430 (2010); R. G. McGrath, Business models: a discovery driven approach, Long Range
Planning 43(2e3), 247e261 (2010); Y. L. Doz and M. Kosonen, Embedding strategic agility: a leadership
agenda for accelerating business model renewal, Long Range Planning 43(2e3), 370e382 (2010); H. Ches-
brough, Business model innovation: opportunities and barriers, Long Range Planning 43(2e3), 354e363
(2010); N. M. Dahan, J. P. Doh, J. Oetzel and M. Yaziji, Corporate-NGO collaboration: co-creating new
business models for developing markets, Long Range Planning 43(2e3), 326e342 (2010); B. W. Wirtz, O.
Schilke and S. Ullrich, Strategic development of business models: implications of the web 2.0 for creating
value on the internet, Long Range Planning 43(2e3), 272e290 (2010); J. D. Thompson and I. C. MacMil-
lan, Business models: creating new markets and societal wealth, Long Range Planning 43(2e3), 291e307
(2010); W. K. Smith, A. Binns and M. L. Tushman, Complex business models: managing strategic para-
doxes simultaneously, Long Range Planning 43(2e3), 448e461 (2010).
26. See L. Doganova and M. Eyquem-Renault, What do business models do? Innovation devices in technology
entrepreneurship, Research Policy 38, 1559e1570, (2009) . Business models are indeed performative in
their sense, but it is useful to distinguish them as models from other ‘market devices’ they discuss,
such as business plans, accounts, targets, etc. Business models address how businesses can work and points
to relationships, whereas business plans may do neither.
27. This factor is also explored in another context in C. Baden-Fuller and J. M. Stopford, Rejuvenating the
Mature Business, Harvard Business Press, Boston, Mass (1994).
28. B. Demil and X. Lecocq, Business model evolution: in search of dynamic consistency, Long Range Planning
43(2e3), 227e246 (2010).
29. We thank Simona Valeriani for discussions on this matter. See S. Valeriani, Behind the façde: Elias Holl
and the Italian influence on building techniques in Augsburg, Working papers on the Nature of Evidence:
How Well Do Facts Travel?, 29/08: Department of Economic History, London School of Economics and
Political Science (2008), downloadable from HYPERLINK ‘‘/exchweb/bin/redir.asp? URL=http://
www.lse.ac.uk/collections/economicHistory/pdf/FACTSPDF/2908Valeriani ’’.
30. It is not only models that have been thought of as recipes: the parallel idea that cake baking demonstrates
that technologies are not describable by a unique routine but have elements of choice can be found in S. G.
Winter, The evolution of Dick Nelson, delivered at the Nelson Fest, (13 October 2000). See: http://etss.net/
evolution/reviews/Nelson_Fest_Winter_Speech.htm.
31. M. Boumans, Built-In Justification, Chapter 4 in M. Morgan and M. Morrison (1999) op. cit. at Ref. 15
(quote is from p. 67).
32. For an articulation see: V. Sabatier, T. Rouselle and V. Mangematin, From recipe to dinner: business
model portfolio in the European biopharmaceutical industry, Long Range Planning 43(2e3), 431e447
(2010).
170 Business Models as Models
http://www.lse.ac.uk/collections/economicHistory/pdf/FACTSPDF/2908Valeriani
http://www.lse.ac.uk/collections/economicHistory/pdf/FACTSPDF/2908Valeriani
http://etss.net/evolution/reviews/Nelson_Fest_Winter_Speech.htm
http://etss.net/evolution/reviews/Nelson_Fest_Winter_Speech.htm
33. M. Yunus, B. Moingeon and L. Lehmann-Ortega, Building social business models: lessons from
the Grameen experience, Long Range Planning 43(2e3), 308e325 (2010) and also J. D. Thompson and
I. C. MacMillan (2010) and N. M. Dahan, et al. (2010), op. cit. at Ref. 24
34. Spender’s Thesis is reprinted in J.-C. Spender, Industry Recipes: The Nature and Sources of Managerial
Judgement, Basil Blackwell, Oxford (1989).
35. J. Porac, H. Thomas and C. Baden-Fuller, Competitive groups as cognitive communities: the case of
Scottish knitwear manufacturers, Journal of Management Studies 26(4), 397e416 (1989).
36. See M. Morrison and M. S. Morgan, Mediating instruments Chapter 2 in M. S. Morgan and M. Morrison.
(1999) op. cit. Ref. 15.
Biographies
Charles Baden-Fuller, Fellow of the Strategic Management Society, has been the Centenary Professor of Strategy,
Cass Business School since 1995 and Editor-in-Chief of Long Range Planning since 1999. He is a Visiting Scholar at
the Wharton School, University of Pennsylvania, and is highly regarded for his research work on topics such as the
management of transformational change; exit behaviour; managerial cognition and knowledge replication and
transfer. He advises UK and European companies on change management; business model choice; and growth
strategies, especially in biotechnology.
Mary S. Morgan is a Fellow of the British Academy and Overseas Fellow of the Royal Dutch Academy of Arts and
Sciences, and holds chairs in the History and Philosophy of Economics at the London School of Economics and at
the University of Amsterdam. She has published widely on topics ranging from statistics to experiments to nar-
rative, and from Social Darwinism in 19th century America to game theory in the Cold War. Her major books
include The History of Econometric Ideas (1990) and Models as Mediators (1999 with Margaret Morrison), while her
account of economic modelling is forthcoming in The World in the Model. She has recently concluded a major
interdisciplinary team project: How Well Do Facts Travel? (with Peter Howlett) and is currently ‘Re-thinking Case
Studies Across the Social Sciences’ as a British Academy-Wolfson Research Professor.
Long Range Planning, vol 43 2010 171
Business Models as Models
Introduction
Business models as descriptions of ‘kinds’ in a taxonomy
Business models as model organisms for investigation
Business models as recipes
Conclusions
Acknowledgements
References
F A L L 2 0 1 6 I S S U E
Clayton M. Christensen
Thomas Bartman
Derek van Bever
The Hard Truth
About Business
Model Innovation
Many attempts at business model innovation fail. To change
that, executives need to understand how business models
develop through predictable stages over time — and then
apply that understanding to key decisions about new business
models.
Vol. 58, No. 1 Reprint #58123 http://mitsmr.com/2cBmhTk
http://mitsmr.com/2cBmhTk
The Hard Truth
About Business
Model Innovation
E S S AY : B U S I N E S S M O D E L S
PLEASE NOTE THAT GRAY AREAS REFLECT ARTWORK THAT HAS BEEN INTENTIONALLY REMOVED.
THE SUBSTANTIVE CONTENT OF THE ARTICLE APPEARS AS ORIGINALLY PUBLISHED.
THE LEADING
QUESTION
How can
executives
improve their
odds of
success at
business
model
innovation?
FINDINGS
�Understand that,
over time, business
models become
more resistant to
change.
�Analyze how consis-
tent a proposed
business model
innovation is with
the priorities of the
existing business.
SURVEYING THE LANDSCAPE of recent attempts
at business model innovation, one could be forgiven for be-
lieving that success is essentially random. For example,
conventional wisdom would suggest that Google Inc., with its
Midas touch for innovation, might be more likely to succeed
in its business model innovation efforts than a traditional,
older, industrial company like the automaker Daimler AG.
But that’s not always the case. Google+, which Google
launched in 2011, has failed to gain traction as a social net-
work, while at this writing Daimler is building a promising
new venture, car2go, which has become one of the world’s
leading car-sharing businesses. Are those surprising out-
comes simply anomalies, or could they have been predicted?
To our eyes, the landscape of failed attempts at business
model innovation is crowded — and becoming more so — as
management teams at established companies mount both of-
fensive and defensive initiatives involving new business
models. A venture capitalist who advises large financial ser-
vices companies on strategy shared his observation about the
anxiety his investors feel about the changes underway in their
industry: “They look at the fintech [financial technology]
startups and see their business models being unbundled and
attacked at every point in the value chain.” And financial
services companies are not alone. A PwC survey published in
2015 revealed that 54% of CEOs worldwide were concerned
about new competitors entering their market, and an equal
percentage said they had either begun to compete in
FALL 2016 MIT SLOAN MANAGEMENT REVIEW 31
Many attempts at business model innovation fail. To change that,
executives need to understand how business models develop
through predictable stages over time — and then apply that
understanding to key decisions about new business models.
BY CLAYTON M. CHRISTENSEN, THOMAS BARTMAN, AND DEREK VAN BEVER
32 MIT SLOAN MANAGEMENT REVIEW FALL 2016 SLOANREVIEW.MIT.EDU
E S S AY : B U S I N E S S M O D E L S
nontraditional markets themselves or considered
doing so.1 For its part, the Boston Consulting Group
reports that in a 2014 survey of 1,500 senior execu-
tives, 94% stated that their companies had attempted
some degree of business model innovation.2
We’ve decided to wade in at this juncture because
business model innovation is too important to be left
to random chance and guesswork. Executed correctly,
it has the ability to make companies resilient in the face
of change and to create growth unbounded by the lim-
its of existing businesses. Further, we have seen
businesses overcome other management problems
that resulted in high failure rates. For example, if you
bought a car in the United States in the 1970s, there
was a very real possibility that you would get a “lemon.”
Some cars were inexplicably afflicted by problem after
problem, to the point that it was accepted that such
lemons were a natural consequence of inherent ran-
domness in manufacturing. But management expert
W. Edwards Deming demonstrated that manufactur-
ing doesn’t have to be random, and, having
incorporated his insights in the 1980s, the major auto-
motive companies have made lemons a memory of a
bygone era. To our eyes, there are currently a lot of lem-
ons being produced by the business model innovation
process — but it doesn’t have to be that way.
In our experience, when the business world en-
counters an intractable management problem, it’s a
sign that business executives and scholars are get-
ting something wrong — that there isn’t yet a
satisfactory theory for what’s causing the problem,
and under what circumstances it can be overcome.
This is what has resulted in so much wasted time
and effort in attempts at corporate renewal. And
this confusion has spawned a welter of well-mean-
ing but ultimately misguided advice, ranging from
prescriptions to innovate only close to the core
business to assertions about the type of leader who
is able to pull off business model transformations,
or the capabilities a business requires to achieve
successful business model innovation.
The hard truth about business model innova-
tion is that it is not the attributes of the innovator
that principally drive success or failure, but rather
the nature of the innovation being attempted. Busi-
ness models develop through predictable stages
over time — and executives need to understand the
priorities associated with each business model
stage. Business leaders then need to evaluate
whether or not a business model innovation they
are considering is consistent with the current pri-
orities of their existing business model. This
analysis matters greatly, as it drives a whole host of
decisions about where the new initiative should be
housed, how its performance should be measured,
and how the resources and processes at work in the
company will either support it or extinguish it.
This truth has revealed itself to us gradually over
time, but our thinking has crystallized over the past
two years in an intensive study effort we have led at
the Harvard Business School. As part of that research
effort, we have analyzed 26 cases of both successful
and failed business model innovation; in addition,
we have selected a set of nine industry-leading com-
panies whose senior leaders are currently struggling
with the issue of conceiving and sustaining success
in business model innovation. (See “About the Re-
search.”) We have profiled these nine companies’
efforts extensively, documented their successes and
failures, and convened their executives on campus
periodically to enable them to share insights and
frustrations with each other. Stepping back, we’ve
made a number of observations that we hope will
prove generally helpful, and we also have a sense of
the work that remains to be done.
There are a number of lessons that managers can
learn from past successes and failures, but all depend
on understanding the rules that govern business
model formation and development — how new
models are created and how they evolve across time,
the kinds of changes that are possible to those mod-
els at various stages of development, and what that
means for organizational renewal and growth.
The Business Model’s Journey
The confusion surrounding business model innova-
tion begins, appropriately enough, with confusion
about the term “business model.” In our course at
the Harvard Business School, we teach students to
use a four-box business model framework that we
developed with colleagues from the consulting firm
Innosight LLC. This framework consists of the value
proposition for customers (which we will refer to as
the “job to be done”); the organization’s resources,
such as people, cash, and technology; the processes3
that it uses to convert inputs to finished products or
ABOUT THE
RESEARCH
This article assembles
knowledge that the primary
author has developed over
the course of two decades
studying what causes good
businesses to fail, comple-
mented by a two-year
intensive research project to
uncover where current man-
agers and leadership teams
stumble in executing busi-
ness model innovation. Over
the course of the past two
years of in-depth study, we
evaluated 26 business
model innovations in the his-
torical record that had run a
course from idea to develop-
ment to success, or failure.
The study identified 10 fail-
ures and 16 successes and
coded each across 20 di-
mensions to identify
patterns associated with
success and failure.
To further develop our
understanding of the causal-
ity behind the relationships
we observed, we also as-
sembled a cohort of nine
market-leading companies
from industries as diverse as
information technology, con-
sumer products, travel and
leisure, fashion, publishing,
and financial services. Each
of these companies is at-
tempting to execute some
degree of business model
innovation. We observed
these companies as they
undertook their business
model innovation efforts and
conducted interviews with
more than 60 C-level execu-
tives across the nine
companies. In addition to our
interviews, we convened
two working sessions at
Harvard Business School
that brought executives
from each company to-
gether to discuss the
challenges, opportunities,
and realities of business
model innovation from the
perspective of the manager.
SLOANREVIEW.MIT.EDU FALL 2016 MIT SLOAN MANAGEMENT REVIEW 33
services; and the profit formula that dictates the mar-
gins, asset velocity, and scale required to achieve an
attractive return.4 (See “The Elements of a Business
Model.”) Collectively, the organization’s resources
and processes define its capabilities — how it does
things — while its customer value proposition and
profit formula characterize its priorities — what it
does, and why. 5
This way of viewing business models is useful for
two reasons. First, it supplies a common language
and framework to understand the capabilities of a
business. Second, it highlights the interdependencies
among elements and illuminates what a business is
incapable of doing. Interdependencies describe the
integration required between individual elements of
the business model — each component of the model
must be congruent with the others. They explain why,
for example, Rolls-Royce Motor Cars Ltd. is unable to
sell cheap bespoke cars and why Wal-Mart Stores Inc.
is unable to combine low prices with fancy stores.
Understanding the interdependencies in a business
model is important because those interdependencies
grow and harden across time, creating another funda-
mental truth that is critical for leaders to understand:
Business models by their very nature are designed not to
change, and they become less flexible and more resistant
to change as they develop over time. Leaders of the
world’s best businesses should take special note, be-
cause the better your business model performs at its
assigned task, the more interdependent and less capa-
ble of change it likely is. The strengthening of these
interdependencies is not an intentional act by manag-
ers; rather, it comes from the emergence of processes
that arise as the natural, collective response to recur-
rent activities. The longer a business unit exists, the
more often it will confront similar problems and the
more ingrained its approaches to solving those prob-
lems will become. We often refer to these ingrained
approaches as a business’s “culture.”6
In fact, this pattern is so consistent and important
that we’ve begun to think of the development of a
business model across time as resembling a journey
whose progress and route are predictable — although
the time that it takes a business model to follow this
journey will differ by industry and circumstance.
(See “The Three Stages of a Business Model’s Jour-
ney,” p. 34.) As the diagram depicts, a business model,
which in an established company is typically
embodied in a business unit,7 travels a one-way jour-
ney, beginning with the creation of the new business
unit and its business model, then shifting to sustain-
ing and growing the business unit, and ultimately
moving to wringing efficiency from it. Each stage of
the journey supports a specific type of innovation,
builds a particular set of interdependencies into the
model, and is responsive to a particular set of perfor-
mance metrics. This is the arc of the journey of
virtually every business model — if it is lucky and
successful enough to travel the entire length of the
route. Unsuccessful business units will falter before
concluding the journey and be absorbed or shut-
tered. Now, let’s explore each of the three stages and
how the business model evolves through them.
1. Creation Peter Drucker once said that the pur-
pose of a business is to create a customer.8 That
goal characterizes the first stage of the journey,
when the business searches for a meaningful value
proposition, which it can design initial product
and service offerings to fulfill. This is the stage
THE ELEMENTS OF A BUSINESS MODEL
A business model is made up of four elements: (1) a value
proposition for customers; (2) resources, such as people,
money, and technology; (3) the processes that the organiza-
tion uses to convert inputs to finished products or services;
and (4) the profit formula that dictates the margins, asset
velocity, and scale required to achieve an attractive return.
Interdependencies, represented here by bidirectional arrows,
describe the integration required between individual elements
of the business model. They require that every component of
the model be congruent with every other component.
A product that helps
customers to more
effectively, conveniently,
and affordably do a job
they’ve been trying to do
Assets and fixed cost
structure, and the margins
and velocity required to
cover them
People, technology,
products, facilities,
equipment, brands, and
cash that are required to
deliver this value
proposition to the
targeted customers
Ways of working together
to address recurrent tasks
in a consistent way:
training, development,
manufacturing, budgeting,
planning, etc.
Value proposition
Profit formula
Resources
Priorities Capabilities
Processes
34 MIT SLOAN MANAGEMENT REVIEW FALL 2016 SLOANREVIEW.MIT.EDU
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at which a relatively small band of resources (a
founding team armed with an idea, some funding
and ambition, and sometimes a technology) is en-
tirely focused on developing a compelling value
proposition — fulfilling a significant unmet need,
or “job.”9 It’s useful to think of the members of the
founding team as completely immersed in this
search. The information swirling around them at
this point in the journey — the information they
pay the most attention to — consists of insights
they are able to glean into the unfulfilled jobs of
prospective customers.
We emphasize the primacy of the job at this
point of the journey because it is very difficult for a
business to remain focused on a customer’s job as
the operation scales. Understanding the progress a
customer is trying to make — and providing the
experiences in purchase and use that will fulfill that
job perfectly — requires patient, bottom-up in-
quiry. The language that is characteristic of this
stage is the language of questions, not of answers.
The link between value proposition and resources
is already forming, but the rest of the model is still
unformed: The new organization has yet to face the
types of recurrent tasks that create processes, and
its profit formula is nascent and exploratory. This
gives the business an incredible flexibility that will
disappear as it evolves along the journey and its
language shifts from questions to answers.
2. Sustaining Innovation Business units lucky
and skilled enough to discover an unfulfilled job
and develop a product or service that addresses it
enter the sustaining innovation phase of the busi-
ness model journey. At this stage, customer demand
reaches the point where the greatest challenge the
business faces is no longer determining whether the
product fulfills a job, but rather scaling operations
to meet growing demand. Whereas in the creation
phase the business unit created customers, in the
sustaining innovation phase it is building these
customers into a reliable, loyal base and building
the organization into a well-oiled machine that
delivers the product or service flawlessly and re-
peatedly. The innovations characteristic of this
phase of the business model journey are what we
call sustaining innovations — in other words, bet-
ter products that can be sold for higher prices to the
current target market.
A curious change sets in at this stage of the jour-
ney, however: As the business unit racks up sales, the
voice of the customer gets louder, drowning out to
some extent the voice of the job. Why does this hap-
pen? It’s not that managers intend to lose touch with
the job, but while the voice of the job is faint and re-
quires interrogation to hear, the voice of the
customer is transmitted into the business with each
sale and gets louder with every additional transac-
tion. The voice of the job emerges only in one-to-one,
in-depth conversations that reveal the job’s context
in a customer’s life, but listening to the voice of the
customer allows the business to scale its understand-
ing. Customers can be surveyed and polled to learn
their preferences, and those preferences are then
channeled into efforts to improve existing products.
The business unit is now no longer in the busi-
ness of identifying new unmet needs but rather in
the business of building processes — locking down
the current model. The data that surrounds manag-
ers is now about revenues, products, customers, and
competition. While in the creation phase, the found-
ing team had to dig to discover data, data now floods
THE THREE STAGES OF A BUSINESS MODEL’S JOURNEY
A business model, which in an established company is typically embodied in a busi-
ness unit, travels a journey that begins with the creation of the new business unit and
its business model, and then shifts to sustaining and growing the business unit — and
still later to wringing efficiency from it. Each stage of the journey is conducive to a
specific type of innovation, builds a particular set of interdependencies into the model,
and is responsive to a particular set of performance metrics. Green bidirectional arrows
represent interdependencies between aspects of the business model that are well-
established at that stage; business model elements in bold represent areas of focus
during that stage of business model evolution. Business model elements and interde-
pendencies shown in beige are still somewhat flexible at that point in the journey.
• Market-creating innovations
• Metrics about job to be done
• Data about context of the job
• Flexible business model
• Language of questions
about the job and context
• Sustaining innovations
• Income statement metrics
• Data about customers
• Processes emerge
• Language of statements
about products, customers,
competitors, and markets
• Efficiency innovations
• Balance sheet, ratio metrics
• Data about costs, efficiency
• Rigid business model to
facilitate modularity
• Language of statements
about cost and efficiency
Creation
Sustaining Innovation
Efficiency
Market
forms and
business
begins
to grow
Processes form
in response to
recurrent tasks
Performance
oversupply
may creep in
Modular
structure
forms
Investors
demand
return of
capital
Value
proposition Resources
ProcessesProfitformula
Value
proposition Resources
ProcessesProfitformula
Value
proposition Resources
ProcessesProfitformula
SLOANREVIEW.MIT.EDU FALL 2016 MIT SLOAN MANAGEMENT REVIEW 35
the business’s offices, with more arriving with each
new transaction. Data begs to be analyzed — it is the
way the game is scored — so the influx of data pre-
cipitates the adoption of metrics to evaluate the
business’s performance and direct future activity to
improving the metrics. The performance metrics in
this phase focus on the income statement, leading
managers to direct investments toward growing the
top line and maximizing the bottom line.
3. Efficiency At some point, however, these invest-
ments in product performance no longer generate
adequate additional profitability. At this point, the
business unit begins to prioritize the activities of effi-
ciency innovation, which reduce cost by eliminating
labor or by redesigning products to eliminate com-
ponents or replace them with cheaper alternatives.
(There is, however, always some amount of both
types of innovation — sustaining and efficiency —
occurring at any point of a business’s evolution.)
Broadly, the activities of efficiency innovation in-
clude outsourcing, adding financial leverage,
optimizing processes, and consolidating industries to
gain economies of scale. While many factors can
cause businesses to transition into the efficiency in-
novation phase of their evolution, one we have often
observed is the result of performance “overshoot,”
in which the business delivers more performance
than the market can utilize and consumers become
unwilling to pay for additional performance im-
provement or to upgrade to improved versions.
Managers should not bemoan the shift to efficiency
innovation. It needs to happen; over time, business
units must become more efficient to remain com-
petitive, and the shift to efficiency innovations as
the predominant form of innovation activity is a
natural outcome of that process.
To managers, the efficiency innovation phase
marks the point where the voice of the shareholders
drowns out the voice of the customer. Gleaning new
understanding of that initial job to be done is now
the long-lost ambition of a bygone era, and manag-
ers become inundated with data about costs and
efficiency. The business unit frequently achieves
efficiency by shifting to a modular structure, stan-
dardizing the interdependencies between each of the
components of its business model so that they may
be outsourced to third parties. In hardening these
interdependencies, the business unit reaps the
efficiency rewards of modularization but leaves flex-
ibility behind, firmly cementing the structure of its
business model in place. Deviations from the exist-
ing structure undermine the modularity of the
components and reduce efficiency, so when evaluat-
ing such changes, the business will often choose to
forsake them in pursuit of greater efficiency.
Now, when the business unit generates increasing
amounts of free cash flow from its efficiency innova-
tions, it is likely to sideline the capital, to diversify
the company, or to invest it in industry consolidation.
This is one of the major drivers of merger and ac-
quisition (M&A) activity. Whereas the sustaining
innovation phase was exciting to managers, customers,
and shareholders, the efficiency innovation phase re-
duces degrees of managerial freedom. Efficiency
innovations lure managers with their promises of low
risk, high returns, and quick paybacks from cost reduc-
tion, but the end result is often a race to the bottom that
sees the business’s ability to serve the job and customers
atrophy as it improves its service to shareholders.
The natural evolution of business units occurs all
around us. Consider the case of The Boeing Co. and
its wildly successful 737 business unit. The 737 busi-
ness was announced in 1965 and launched its first
version, the 737-100, in 1967, with Lufthansa as its
first customer. With orders from several additional
major airlines, the new business unit demonstrated
that its medium-haul plane fulfilled an important job
to be done. Before even delivering the first -100,
Boeing began improving the 737 and launched a
Managers should not bemoan the shift to efficiency innovation.
It needs to happen; over time, business units must become
more efficient to remain competitive.
36 MIT SLOAN MANAGEMENT REVIEW FALL 2016 SLOANREVIEW.MIT.EDU
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stretched version, the -200, with a longer fuselage to
meet demands from airlines requiring greater seating
capacity. Boeing entered the sustaining innovation
phase and continued to improve its product by devel-
oping several generations of new 737s, stretching the
fuselage like an accordion while nearly doubling the
plane’s range and more than doubling its revenue per
available seat mile. The business continued to im-
prove how it served customers with the Next
Generation series in the 1990s, which offered even
bigger aircraft and better avionics systems.
Facing increased competition and demands for
improved financial performance, the 737 business
shifted its focus to efficiency innovation in the early
2000s. To free resources and liberate capital, Boeing
began to outsource aspects of 737 production. Most
notably, Boeing sold a facility in Wichita, Kansas, that
manufactured the main fuselage platform for the
737 to the Toronto-based investment company Onex
Corp. in 2005. Outsourcing subsystem production
allowed the business to improve its capital efficiency
and deliver improved returns on capital.10
Given that road map, what is the hope for com-
panies that seek to develop new business models or
to create new businesses? Thus far in this article
we’ve explored the journey that business units take
over time. And while we’re not sure that a business
unit can break off from this race, we know that its
parent companies can — by developing new busi-
nesses. Although the processes of an individual
business unit’s business model propel it along this
journey, the opportunity exists to develop a process
of business creation at the corporate level. But doing
so successfully requires paying careful attention to
the implications of the business model road map.
Implications For Business
Model Innovation
It’s worth internalizing the road map view of busi-
ness model evolution because it helps explain why
most attempts to alter the course of existing
business units fail. Unaware of the interdependen-
cies and rigidities that constrain business units to
pursuing their existing journey, managers attempt
to compel existing business units to pursue new
priorities or attempt to create a new business inside
an existing unit. Using the road map as a guiding
principle allows leaders to correctly categorize the
innovation opportunities that appear before them
in terms of their fit with their existing business
model’s priorities. Several recommendations for
managers emerge from this insight.
Determine how consistent the opportunity is
with the priorities of the existing business model.
The only types of innovation you can perform nat-
urally within an existing business model are those
that build on and improve the existing model and
accelerate its progress along the journey — in other
words, those innovations that are consistent with
its current priorities — by sharpening its focus on
fulfilling the existing job or improving its financial
performance. Therefore, a crucial question for
leaders to ask when evaluating an innovation op-
portunity is: To what degree does it align with the
existing priorities of the business model?
Many failed business model innovations involve
the pursuit of opportunities that appear to be con-
sistent with a unit’s current business model but that
in fact are likely to be rejected by the existing busi-
ness or its customers. (See “Evaluating the Fit
Between an Opportunity and an Existing Busi-
ness.”) To determine how consistent an opportunity
is with the priorities of the existing business model,
leaders should ask: Is the new job to be done for the
customer similar to the existing job? (The greater
the similarity, the more appropriate it is for the ex-
isting business to pursue the opportunity.) How
does pursuit of the opportunity affect the existing
profit formula? Are the margins better, transaction
sizes larger, and addressable markets bigger? If so, it
is likely to fit well with the existing profit formula.
If not, managers should tread with caution in
The only types of innovation you can perform naturally within
an existing business model are those that build on and improve
the existing model and accelerate its progress.
SLOANREVIEW.MIT.EDU FALL 2016 MIT SLOAN MANAGEMENT REVIEW 37
asking an existing business to take it on — and
should instead consider creating a separate unit to
pursue the new business model.
This distinction helps explain the performance
of the two innovations with which we opened this
article. Google saw Google+ as an extension of its
search business and chose to integrate Google+
into its existing products and business. Google+ ac-
counts were integrated into other Google products,
and the business saw the incorporation of informa-
tion from users’ social networks as a way to generate
improved, tailored search results. Viewed through
the lens of Google’s business model, a social net-
work allowed the business to generate greater
revenue and profitability by better targeting adver-
tisements and delivering more advertisements
through increased usage of its product platform.
However, consumers apparently didn’t see the
value from combining search and social network-
ing; to the consumer, the jobs are very different and
arise in different circumstances in their lives. So
while Google maintains its exceptional search busi-
ness, its social network failed to gain momentum.
Contrast Google’s experience to that of Daimler,
which recognized that car2go was a very different
business and established it far afield from the home
office and existing business. Daimler started car2go
as an experiment tested by its employees working in
Ulm, Germany. It housed the business in a corporate
incubator that does not report to the existing con-
sumer automotive businesses and designed it from
the outset to fulfill Daimler’s core job of providing
mobility, but without the need to convince consum-
ers to purchase vehicles. Recognizing that the
priorities of a business that rents cars by the minute
are very different from those involved in selling lux-
ury vehicles, Daimler has kept car2go separate and
allowed it to develop a unique business model capa-
ble of fulfilling its job profitably. However, car2go
benefits from Daimler’s ownership by using corpo-
rate resources where appropriate — for example,
car2go rents only vehicles in the Daimler portfolio,
principally the Smart Fortwo.
To achieve successful business model innova-
tion, focus on creating new business models, rather
than changing existing ones. As business model in-
terdependencies arise, the ability to create new
businesses within existing business units is lost. The
resources and processes that work so perfectly in
their original business model do so because they have
been honed and optimized for delivering on the pri-
orities of that model. The classic example of this was
the movie rental company Blockbuster, which at-
tempted to develop a new DVD-by-mail business in
response to the rise of Netflix Inc. by integrating that
offering with its existing store network. This “bricks-
and-clicks” combination made perfect sense to
Blockbuster’s managers, but what became obvious
only in hindsight was that the two models would be
at war with each other — the asset velocity required
to maintain a profitable store network was incompat-
ible with the DVD-by-mail offering. The paradox
that managers must confront is that the specialized
EVALUATING THE FIT BETWEEN AN OPPORTUNITY
AND AN EXISTING BUSINESS
Determining whether an opportunity aligns to a business’s existing priorities is
not an exact science, but there are questions that managers should ask to gauge
how closely an opportunity aligns to the existing priorities. The greater the degree
of alignment, the better it is to pursue the opportunity through the existing busi-
ness; conversely, the greater the difference, the more necessary it will be to
pursue the opportunity through a separate, dedicated business unit that has the
autonomy to develop a unique business model to fulfill those objectives.
IN THE CREATION STAGE In this phase, the entirety of the business unit’s
focus should be dedicated to understanding the primary business, accom-
plished through discovery of the job to be done and “pivoting” of the business
model to effectively fulfill the functional, emotional, and social attributes of that
job or a superior unfulfilled job that is discovered.
IN THE SUSTAINING INNOVATION STAGE In this phase, managers should
evaluate the fit between the opportunity and the existing business unit on the
basis of the consistency with the existing unit’s job to be done and the effect on
its income statement. Questions managers should ask include:
Does the innovation opportunity…
• Improve our ability to better serve the existing job to be done, in similar
circumstances in customers’ lives?
• Grow our current addressable market or bring new customers into our
market?
• Improve our revenue growth, profitability, or margins?
• Help us to make more money in the way we are structured to make
money?
IN THE EFFICIENCY STAGE When the business unit is focused on efficiency,
managers should evaluate the fit between innovation opportunities and the ex-
isting business by the impact on the balance sheet. Questions managers
should ask include:
Does the innovation opportunity…
• Enable us to serve our existing customers with lower costs?
• Allow us to use our capital more efficiently?
• Allow us to liberate capital currently invested in the value chain?
• Enable us to modularize our offering to facilitate outsourcing and other
partnerships for non-core elements of the model?
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capabilities that are highly valuable to their current
business model will tend to be unsuitable for, or even
run counter to, the new business model.
Building a Business
Creation Engine
For some time, we’ve argued that companies should
build a business creation engine, capable of turning
out a steady stream of innovative new business
models, but to date no company we know of has
built an enduring capability like that. We think that
such an engine of sustained growth would quickly
prove to be a company’s most valuable asset, pro-
viding growth and creating new markets. But
unleashing this growth potential requires very dif-
ferent behaviors than those required to successfully
exploit existing markets.
The challenge, as the journey metaphor we’ve de-
veloped here should make clear, is that what is
necessary is to turn an event — the act of creating a
new business and a new business model — into a re-
peatable process at the corporate level. It must be a
process because events are discrete activities with de-
finitive start and end points, whereas processes are
continuous and dynamic. Learnings from a previous
event do not naturally or easily flow to subsequent
events, causing the same mistakes to be repeated
over and over. In contrast, processes by their nature
can be learning opportunities that incorporate in fu-
ture attempts what was discovered in previous
iterations. Enacted as a process, the act of creation
will improve over time and refine its ability to dis-
cover unfulfilled customer jobs and create new
markets; the success rate will improve alongside the
process, creating a virtuous cycle of growth.
While we have not discovered a perfect exem-
plar of this discipline, we have been tracking the
efforts of some leading companies that are intent
on building such a capability. While it is too early to
hold any of them up as success stories, we can
nonetheless discern five approaches that we believe
have the potential to lead to success. Let’s look at
each of these approaches in turn.
Spot future growth gaps by understanding
where each of your business units is on the jour-
ney. In our course at Harvard Business School,
we teach students to use a tool called the aggregate
project plan to allocate funding to different types of
innovation.11 Such a plan categorizes innovations
by their distance from existing products and mar-
kets and specifies a desired allocation of funding
to each bucket. We see application for this tool here
as well.
The innovation team at Carolinas HealthCare
System, a not-for-profit health care organization
based in Charlotte, North Carolina, performed
this type of analysis and identified a need to field
additional innovation efforts that reflected the or-
ganization’s belief that hospitals will be less central
in the health care system of the future. Armed with
this view, Carolinas HealthCare System has been
able to plan innovation activity by type, ensuring
that the organization invests appropriately across
all three categories of the business model journey.
As Dr. Jean Wright, chief innovation officer at
Carolinas HealthCare System, said, “The strength
of the journey framework is that it allowed us to
see that our investments in business creation are
very different from our investments in our existing
businesses. More importantly, it has helped us see
that both types are important.”
Run with potential disruptors of your busi-
ness. Another approach is to create incentives and
channels for entrepreneurs to bring new and, in
some cases, potentially disruptive business models
to you, either as potential customers or as ecosys-
tem partners. ARM Holdings plc, a developer and
licenser of system-on-chip semiconductors, head-
quartered in Cambridge, U.K., has had success
viewing itself as the central, coordinating node of a
Another approach is to create incentives and channels for
entrepreneurs to bring new and, in some cases, potentially
disruptive business models to you, either as potential customers
or as ecosystem partners.
SLOANREVIEW.MIT.EDU FALL 2016 MIT SLOAN MANAGEMENT REVIEW 39
symbiotic ecosystem of independent semiconduc-
tor manufacturers and consumer products
companies, rather than as a traditional semicon-
ductor company that develops and manufactures
proprietary, standard products. Today, nearly
every smartphone and mobile device includes at
least one ARM design. The company achieved this
ubiquity by inviting customers and consumers
into its development process so that it will be the
first company called by customers seeking to de-
sign a new chip. It does this in two ways: first, by
incorporating knowledge across its entire ecosys-
tem that allows it to develop optimized end-to-end
solutions for customers, and second, by employing
a royalty-based revenue model that ensures ARM’s
incentives are aligned with those of its customers.
Start new businesses by exploring the job to be
done. When identifying new market opportunities,
it’s critical that you begin with a focus on the cus-
tomer’s job to be done, rather than on your
company’s capabilities. It’s tempting to look at your
capabilities as the starting point for any expansion,
but capabilities are of no use without a job for
them. For incumbents, this requires staying fo-
cused on the job rather than the market or
capability. One examples of this discipline is Corn-
ing Inc., the manufacturer of specialty glass and
ceramic materials based in Corning, New York.
When it becomes apparent that a Corning business
can no longer generate a premium price from its
technical superiority — when it reaches the effi-
ciency innovation stage, in our framework — the
company divests that business and uses the pro-
ceeds to expand businesses in the sustaining stage
and to create new ones. For example, when Corn-
ing realized that liquid crystal display (LCD) would
eventually replace cathode ray tube (CRT) technol-
ogy to become the future of display, the company
focused on the job to be done — display — rather
than just on the CRT market, which at the time
was important to the company. Corning began
inventing products to enable the growth of the
LCD industry and eventually decided to exit the
CRT market.12 To Corning, businesses serve needs,
not markets, and as technological or market shifts
occur, the company continues to grow by remain-
ing focused on the need, which we call the job.
Resist the urge to force new businesses to find
homes in existing units. When executives start
new businesses, they often look at them and won-
der, “Where do I stick this in my organization?”
They feel pressure to combine new businesses with
existing structures to maximize efficiency and
spread overhead costs over the widest base, but this
can spell doom for the new business. When a new
business is housed within an existing unit, it must
adopt the priorities of the existing business to se-
cure funding; in doing so, the new business often
survives in name but disappears in effect.
Once a new business is launched, it must re-
main independent throughout the duration of its
journey, but maintaining autonomy requires on-
going leadership attention. The forces of efficiency
operate 24/7 inside an organization, rooting out
any cost perceived to be superfluous; standing
against these forces requires the constant applica-
tion of a counterforce that only the company’s
most senior leaders can provide. In the quest for
efficiency, what has been somehow forgotten is the
vital leadership role that corporate executives can
play in fostering organizational innovation by
countenancing the creation of multiple profit for-
mulas and housing these different businesses in a
portfolio of business models.
Use M&A to create internal business model
disruption and renewal. Lastly, while we’ve
focused most of our attention on organic activities,
there’s a very valuable role for M&A in a business
growth engine.13 Although at the extreme, this
approach can result in a quasi-conglomerate
structure that history has proved to be ineffective,
there are exceptions. EMC Corp., based in Hopkinton,
It’s tempting to look at your capabilities as the starting point
for any expansion, but capabilities are of no use without a
job for them.
40 MIT SLOAN MANAGEMENT REVIEW FALL 2016 SLOANREVIEW.MIT.EDU
E S S AY : B U S I N E S S M O D E L S
Massachusetts, adopted this approach with the
creation of its federation structure when it floated
VMware Inc., a company it had acquired three
years earlier, as a publicly traded subsidiary in
2007. Much M&A activity designed to change an
existing business model fails because it’s done for
the wrong reasons and managed in the wrong way,
often resulting in the integration of units that
should remain autonomous. In contrast, EMC’s
federation structure allows each business to pur-
sue its individual objectives while coordinating the
company’s activity as a whole. This embedded ca-
pability for exploiting existing markets while
identifying and investing in new markets allowed
EMC to expand out of its traditional memory
business into machine virtualization, agile devel-
opment, and information security.
The Greatest Innovation Risk
Executives sometimes prefer to invest in their
existing businesses because those investments
seem less risky than trying to create entirely new
businesses. But our understanding of the business
model journey allows us to see that, over the long
term, the greatest innovation risk a company can
take is to decide not to create new businesses that
decouple the company’s future from that of its
current business units.
We take great hope from the insights about
business model innovation and corporate renewal
that we have explored in this article — not because
we believe that business units can evade or escape
the journey that we have described, but because we
believe that the corporations that house these units
can. There remains much to be learned about
corporate renewal and the business model journey,
but we hope that insights from the business model
road map can help companies learn how to create
robust corporate-level business creation engines
that will renew their organizations and power
growth. The challenge is great — but so are the
potential rewards.
Clayton M. Christensen is the Kim B. Clark Professor
of Business Administration at Harvard Business
School in Boston, Massachusetts. Thomas Bartman is
a former senior researcher at the Forum for Growth
and Innovation at Harvard Business School. Derek
van Bever is a senior lecturer of business administra-
tion at Harvard Business School, as well as director of
the Forum for Growth and Innovation. Comment on
this article at http://sloanreview.mit.edu/x/58123, or
contact the authors at smrfeedback@mit.edu.
REFERENCES
1. PwC, “2015 US CEO Survey: Top Findings — Grow and
Create Competitive Advantage,” n.d., www.pwc.com.
2. Z. Lindgardt and M. Ayers, “Driving Growth with
Business Model Innovation,” October 8, 2014,
www.bcg.perspectives.com.
3. See D.A. Garvin, “The Processes of Organization and
Management,” Sloan Management Review 39, no. 4
(summer 1998): 33-50. In discussing processes, we refer
to all of the processes that Garvin identified in that article.
4. This business model framework was developed in 2008;
see M.W. Johnson, C.M. Christensen, and H. Kagermann,
“Reinventing Your Business Model,” Harvard Business
Review 86, no. 12 (December 2008): 50-59.
5. For more information about organizational capabilities,
see C.M. Christensen and S.P. Kaufman, “Assessing Your
Organization’s Capabilities: Resources, Processes, and
Priorities,” module note 9-607-014, Harvard Business
School, Boston, Massachusetts, August 21, 2008,
http://hbr.org.
6. See E.H. Schein, “Organizational Culture and Leader-
ship” (San Francisco, California: Jossey-Bass, 1985).
7. It’s worth noting that startups typically begin with one
business unit, which is the company. Then as the organi-
zation grows, companies typically create corporate
offices and business units that separate responsibility for
the administration of the organization from the specific
business. Today, managers tend to operate lean corporate
offices that often function as thin veneers between the
business and investors, but we believe that there is a vital
role for the corporate office in leading business creation
and developing innovation.
8. P.F. Drucker, “The Practice of Management” (New
York: Harper & Row, 1954).
9. For a more complete treatment of jobs to be done, see
C.M. Christensen, T. Hall, K. Dillon, and D.S. Duncan,
“Competing Against Luck: The Story of Innovation and
Customer Choice” (New York: HarperCollins, in press).
10. W. Shih and M. Pierson, “Boeing 737 Industrial Foot-
print: The Wichita Decision,” Harvard Business School
case no. 612-036 (Boston, Massachusetts: Harvard
Business School Publishing, 2011, revised 2012).
11. S.C. Wheelwright and K.B. Clark, “Creating Project
Plans to Focus Product Development,” Harvard Business
Review 70, no. 2 (March-April 1992): 70-82.
12. Authors’ teleconference with David L. Morse, execu-
tive vice president and chief technology officer, Corning
Inc., March 8, 2016.
13. J. Gans, “The Disruption Dilemma” (Cambridge,
Massachusetts: MIT Press, 2016).
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58123
Fall 2016 Issue
The Hard Truth About Business Model Innovation
The Hard Truth About Business Model Innovation
About the Research
The Business Model’s Journey
The Elements of a Business Model
The Three Stages of a Business Model’s Journey
1. Creation
2. Sustaining Innovation
3. Efficiency
Implications For Business Model Innovation
Evaluating the Fit Between an Opportunity and an Existing Business
In the Creation Stage
In the Sustaining Innovation Stage
In the Efficiency Stage
Building a Business Creation Engine
The Greatest Innovation Risk
About the Authors
References
When and how to innovate your business
model
Edward Giesen, Eric Riddleberger, Richard Christner and Ragna Bell
B
usiness-model innovation is critical to success in today’s increasingly complex and
fast-changing environment. So corporate leaders need to understand when to adapt
the business model and how to execute the change. Data from IBM’s Global CEO
Study 2008 and an analysis of 28 successful business-model innovators, produced insights
into both the best timing and process.[1,2]
Two questions can help companies develop their strategy and transformation approach for
the new economic environment:
B Under what conditions should companies adapt their business model?
B What capabilities and characteristics support the design and execution of successful
business-model innovation?
The answers define an organization’s strategic agenda for business-model innovation.
When to rethink the business model
Business model innovation can provide significant opportunities both during periods of
rapid economic growth and at times of turmoil. What is critical is to select the right type of
business model given the economic environment and emerging market opportunities, and to
address the set of internal factors that influence the organization’s ability to pursue th
e
required change.
Revisit the enterprise model during economic turmoil. Enterprise model innovation often
occurs during economic downturn as companies seek new ways to gain cost and flexibility
advantages. By adopting new partnering models such as new service models or even
outsourcing, organizations are able to more effectively scale down operations during a
downturn, but also create the additional access to resources to quickly scale up as new
opportunities arise.
Li & Fung is a good example of enterprise-model innovation. It is one of the largest
producers of fashionable clothing, but its core competency is neither fabrics nor design. In
contrast to many competitors, Li
& Fung orchestrates the activities
of a complex network of players
across the value chain without
owning many of the physical
assets that are required for
designing, producing, and
distributing stylish clothing. Li &
Fung is now taking advantage of
the economic environment byReprinted by permission of IBM. All rights reserved
DOI 10.1108/10878571011059700 VOL. 38 NO. 4 2010, pp. 17-26, Q Emerald Group Publishing Limited, ISSN 1087-8572 j STRATEGY & LEADERSHIP j PAGE 17
Edward Giesen, a Partner in
IBM Global Business
Services, leads the
Business Strategy Practice
across Europe, Middle East
and Africa and the IBM
Strategy and Change
practice in Belgium,
Luxembourg and The
Netherlands (edward.
giesen@nl.ibm.com). He
also heads the IBM
Component Business
Modeling global
community.
Eric Riddleberger is a
Partner with IBM Global
Business Services and
leads the Global Business
Strategy Practice and the
Strategy and
Transformation Practice in
the Communications Sector
(eriddle@us.ibm.com).
Richard Christner is a
Partner in the Internal
Strategy and
Transformation Practice
within IBM Global Business
Services (christnr@.
us.ibm.com). Ragna Bell is
the Strategy and Change
lead for the IBM Institute for
Business Value within IBM
Global Business Services
(ragna.bell@us.ibm.com).
making select global acquisitions at favorable prices and by continuing to develop
partnerships.[4]
Exploit ongoing industry transformation. A joint IBM and Carnegie Mellon Tepper School
study analyzed the 2007 and 2008 financial performance of business-model innovators that
participated in the IBM’s Global CEO Study 2008. This analysis found the strongest margin
performance was realized by those companies that, like Li & Fung, entered the downturn
with significant financial means and leveraged their resources to drive industry-model
innovation.[5] We also found that during periods of extensive industry change, companies
can choose to shake up their industries – by harnessing disruptive technologies, going after
new customer segments or dislodging competitors. Companies that don’t respond quickly
will likely become uncompetitive in short order (see Exhibit 1).
In the rapidly evolving movie-rental business, for example, technology change and content
digitization has transformed the industry, spawning a succession of new business models.
Blockbuster has been challenged by fast-growing online competitors with disruptive
businesses models like Netflix. Over the last three years, Blockbuster’s response has been
gradual adaptation of its business model, adding for example, a ‘‘Total Access’’ package for
receiving DVDs through either rental stores or via mail and announcing a partnership with
CinemaNow to deliver movies on demand via the internet.[6] However, the incremental
approach has not been enough to stay ahead of industry transformation and the economic
downturn. As a result, Blockbuster is going through fundamental restructuring, including
closing nearly 1,000 video-rental stores.[7]
Key elements of a business model[3]
B What value is delivered to customers: customer segments, the value proposition, the specific ‘‘job
to be done,’’ what is sold and how it is sold.
B How the value is delivered: critical internal resources and processes as well as external
partnerships.
B How revenue is generated: the pricing model and forms of monetization.
B How the company positions itself in the industry: the company’s role and relationships across the
value chain.
Exhibit 1 Business model innovation during periods of extensive environmental change
Source: Adapted from Johnson G., Scholes K., and Whittington R., Exploring
Corporate Strategy, 7th edition © 2005 Prentice-Hall, Pearson Education Limited
D
eg
re
e
of
c
ha
ng
e
Time
Incremental business model innovation
Balance between environmental and
enterprise change
Misalignment
Gap between environmental
and enterprise change
Transformation or demise
Transformational business
model innovation or demise
During periods of
discontinuity,
companies will either
disrupt or be disrupted
Change in the
environment
Demise
GAP
Transformational
business model innovation
PAGE 18jSTRATEGY & LEADERSHIPj VOL. 38 NO. 4 2010
Develop new value propositions and pricing models to fit customer preferences.
Revenue-model innovation may not deliver an advantage that is as sustainable as
industry- or enterprise-model innovation. But during times of economic turmoil, new
customer preferences and spending patterns are a significant impetus to changing the
pricing model and value proposition.
The auto industry is a good example. While most car manufacturers in the US drastically cut
prices in 2008 to cope with the severe recession, the Korean car manufacturer Hyundai
instead allowed consumers who lost their jobs after they bought their cars to return them
within the first year and have their debt cancelled. Hyundai’s value proposition was a
response to the high degree of uncertainty consumers were feeling, and the car maker also
extended their warranty to five years offering buyers even more security.[8]
Internal factors drive business model innovation. Internally driven changes – such as
product or service innovations – also create a need for a new business models. For
example, the development of a high-end instant-coffee technology developed by Nestlé
prompted the need for a completely new business model. In fact, it spurred the creation of a
separate company in the 1980s, Nespresso, a one-serve coffee product targeted at the
high-end consumer market.
To take this type of product to market, an organization has to address a number of key
questions:
B How much does the new product or service change the business model in general and, in
particular, the customer-value proposition?
B Does the existing pricing model need to be adjusted?
B What new technology, skills and resources need to be acquired?
B How will the overall operating model change?
Is it time to innovate your business model?
Every organization needs to review carefully whether the time is right to revisit its business
model, either to pursue new opportunities in its industry or to respond to competitive or
technology threats posed to its existing model. We have developed a structured set of
questions to help organizations understand the conditions that determine when they should
explore business-model innovation (see Exhibit 2).
Exhibit 2 Factors driving the need for business model innovation
D
eg
re
e
of
c
ha
ng
e
Incremental business model innovation
Balance between environmental and
enterprise change
Misalignment
Gap between environmental
and enterprise change
Transformation or demise
Transformational business
model innovation or demise
During periods of
discontinuity,
companies will either
disrupt or be disrupted
Change in the
environment
Demise
GAP
Transformational
business model innovation
VOL. 38 NO. 4 2010 jSTRATEGY & LEADERSHIPj PAGE 19
The three As of how to innovate your business model
Our research shows that new and innovative business models can succeed independent of
a company’s age, industry, or geography. And in addition to the 28 cases of successful
innovators, we analyzed select organizations that either tried to develop innovative business
models and failed, or simply missed the window of opportunity.[9] We identified a set of
characteristics that strong business-model innovators demonstrate consistently (see
Exhibit 3).
These characteristics – the ‘‘Three As’’ – are critical to the successful design and execution
of business-model innovation:
B Aligned – Leverage core capabilities and design consistency across all dimensions of the
business model, both internally and externally, that build customer value.
B Analytical – Use information strategically to create foresight, and prioritize actions while
measuring and tracking for rapid course correction.
B Adaptable – Link innovative leadership to enhance the ability to effect change and
institutionalize operational flexibility.
Aligned: creating internal and external consistency
According to a number of researchers, the set of internal factors that influence the
organization’s ability to shape business-model innovation have to be fully aligned.[10]
Internally, this requires organizations to start with the customer-value proposition and align
the ways in which revenue is generated and value is delivered. Externally, organizations
Exhibit 3 The ‘‘Three As’’ model for business model innovation
Visionary/innovation
leadership
Strategic foresight
External alignment or “open” business models
Ability to leverage existing assets and capabilities
Internal alignment between industry, revenue (including value
proposition) and enterprise model
•
•
•
•
•
• •
•
•
•
•
•
•
Financial business modeling
Effectiveness measurements
Lead and transparent
processes
Flexible and scalable
technology
Globally optimized operations
Asset and cost flexibility
Leadership and change
Business intelligence and insight
Customer value
Industry
model
Revenue
model
Enterprise
model
Operating model
Effective decisions to support
“breakthrough” innovation
Dynamic course correction
Analytical
Adaptable
Aligned
Source: IBM Institute for Business Value
‘‘ Use information strategically to create foresight, and
prioritize actions while measuring and tracking for rapid
course correction. ’’
PAGE 20jSTRATEGY & LEADERSHIPj VOL. 38 NO. 4 2010
need to orchestrate customers, partners, and suppliers through open collaboration and
partnership models. Finally, many successful business-model innovators leverage existing
assets and capabilities in new and unique ways.
Align internally to provide customer value. Understanding how the elements of
business-model innovation relate and how they create value are critical as an organization
adapts or changes its business model. We especially saw the importance of alignment when
comparing successful business-model innovations against those that failed.
Take the airline industry, for example. Carriers like Southwest Airlines and Ryanair
revolutionized the industry at the low end by introducing an innovative value proposition
consisting of low-cost, point-to-point air travel supported by strong customer service. To
deliver this model, Ryanair aligned all aspects of its organization and operations to be low
cost, such as a standardized fleet of aircraft to minimize repair and maintenance costs,
increasing bargaining power with suppliers, choosing secondary airports with lower airport
fees, and disaggregating the pricing model so that it could charge customers for all extras.
In contrast, several established airlines tried to deliver a low-cost proposition within their
high-cost operating models, including operations and processes, systems, and people.
These models were largely unsuccessful and typically failed within a few years of starting
operations.[11]
Align externally with partners through ‘‘open’’ business models. External alignment with
partners, suppliers, and customers is an important characteristic of an effective,
collaborative business model. The Global CEO 2008 study found that seven out of 10
CEOs focus on collaboration and partnerships in their pursuit of business-model
innovation.[12] A number of open business models are largely built on broad
collaboration and partnering, such as Li & Fung’s global production model, Eli Lilly’s
spin-off ‘‘InnoCentive’’ open innovation model, or the Linux operating system. However, our
research shows that virtually every successful business model demonstrates external
alignment and the ability to work with a large number of collaboration partners.
Use existing assets and capabilities. Successful business-model innovation takes
advantage of existing high-value assets and capabilities within the organization, such as
unique skills, talent, processes, or technology. Apple, for example, exploited the ability to
design user experiences effectively and applied it to the music industry when designing and
launching the iPod.
Nespresso: success through internal alignment
Nestlé’s Nespresso single-serve premium coffee business is a good example of how internal
alignment to its value proposition is critical to delivering success. Based on Nestlé’s product
innovation of the Nespresso espresso system, it initially explored different ways in which to
commercialize it in 1980s. After unsuccessful attempts to penetrate the restaurant and office
market, Nespresso was set up as a wholly-owned subsidiary in 1986 and started to align its
business model elements with delivering the high-quality coffee experience to high-income homes.
Given the extent of differences between the gourmet Nespresso Café and other Nestlé coffee
brands such as bargain-priced Nescafé instant coffee, this required a complete departure from
Nestlé’s traditional model. The success of Nespresso was largely linked to the ability to create a
separate, business model with independent leadership: serving a distinct customer segment
(high-end households versus the traditional mass market); through new distribution channels (mail
and Internet order and luxury stores versus traditional mass retail); different brand positioning
(high-end luxury brand versus traditional mass-market branding); and a new set of external
partnerships, including coffee-machine manufacturers who independently distribute their
machines and retain the profit.
The Nespresso model has proven successful and defendable. Nespresso achieved 35 percent
annual growth over the last decade, and even during 2008, at the height of the economic crisis, it
achieved 30 percent/year revenue growth.[13]
VOL. 38 NO. 4 2010 jSTRATEGY & LEADERSHIPj PAGE 21
Analytical: leveraging business intelligence for greater insight
Successful business-model innovators demonstrate a particularly acute understanding of
their customers and the value that their company can deliver to a new segment, through a
new delivery mechanism, or a new product or service. Increasingly, understanding
customers, markets, channels and competitors is based on sophisticated analytics that
provide better information needed to create advantage in new and unique ways.
Successful innovators use analytics to sift data from inside and outside the enterprise to:
B Create the strategic foresight needed to design the business models of the future.
B Understand their potential economic impact.
B Continuously measure and enhance performance.
Strategic foresight. Foresight is critical for organizations to understand new opportunities
and the potential impact of new technologies, emerging customer segments, or a new set of
product or service capabilities. For example, the insurance company Progressive has built
advanced customer and risk analytics into its business model, which allows it to serve a
higher-risk customer segment profitably. Li & Fung similarly has built analytics and foresight
into its strategic process. In their words, they use foresight and planning to ‘‘institutionalize
the process of reinvention’’.[14]
The ability to better understand potential future scenarios and how the organization can
benefit through new models is now more important than ever as organizations have to
operate – and make decisions – in a more complex and fast changing environment.
Financial business modeling. Financial business-modeling provides the ability to simulate
the interaction (and therefore financial impact) among different kinds of external scenarios
and internal changes based on the specific business-model innovation. Netflix, the
online-movie-rental giant, has used advanced analytics modeling effectively to support
pricing and purchasing decisions (see sidebar, ‘‘Netflix: Using analytics for intelligence and
insight’’ ).
Effectiveness measurements. Well designed measurements provide timely insight about
what is and is not working, better enabling an organization to adapt quickly to new and
changing business realities. The ability to sense and respond to change – both internally
and externally – is critical. Internally, this requires organizations to integrate fragmented
data and perform faster, better extraction and analysis to support business decisions.
Externally, it means that organizations have to be able to integrate data across a partners,
suppliers, and customers to make quick business decisions.
Adaptable: building flexibility into the business model
Business-model adaptability is becoming more important for organizations that need to
manage uncertainty in the current economic environment. Successful business-model
innovators can mimic the speed, flexibility, and mindset of start-up companies, which
describe some of the most radical business-model innovations, while exploiting the
Tata Motors: aligns with partners to deliver Nano
Tata Motors’ new Nano is based on the premise of delivering an affordable car for Indian families. In
order to deliver this value proposition at a revolutionary price point of US$2,500, Tata Motors had to
align its entire organization, supply chain and channels.
For Tata Motors to deliver a viable model at roughly a tenth of the price of a typical four-door sedan, it
had to reconfigure how a car is designed, manufactured and distributed. It redefined its supplier
strategy, choosing to outsource a remarkable 85 percent of the Nano’s components and to use
nearly 60 percent fewer vendors than normal to reduce transaction costs. Tata also brought in its
key suppliers early in the design phase and challenged them to act as partners to bring costs down
in unprecedented ways.[15]
PAGE 22jSTRATEGY & LEADERSHIPj VOL. 38 NO. 4 2010
advantage of existing capabilities, resources, and assets. When reviewing both start-ups
and established companies, we found that business-model adaptability was based on the
effective combination of leadership and change capabilities throughout the organization, as
well as an operating model that enables dynamic course correction and rapid execution
(see sidebar, ‘‘Bharti has built adaptability into its business model’’).
Leadership and change. Successful business-model innovators can and are willing to
pursue new opportunities and models while maintaining a ruthless focus on sustaining
current business. Successful business-model innovators are able to explore, experiment,
and pilot new models without putting the performance of existing models at risk.[16]
Analytics checklist
Does your business model leverage analytics for intelligence and insight?
Do you regularly assess the strategic opportunities in your environment, based on new and
disruptive models emerging in your industry?
How detailed and accurate is your customer, supplier, and partner information?
Do you deeply understand what your customers want or how they value your current offerings?
Does your organization have the means to understand the financial and business impact of different
business-model options?
Are you able to access and assess information in real time, both internally and externally, to allow
dynamic course correction?
Bharti has built adaptability into its business model
Bharti is one of India’s largest telecommunications providers – but it doesn’t own a network. It asked
the question, ‘‘What do customers really value?’’ The answer: multiple new and innovative services
delivered quickly, plus excellent service. Bharti is delivering against that proposition and
outmaneuvering its competitors by unshackling itself from investment and management of either
the network or the supporting infrastructure.
What Bharti put in place was a global partnering model by outsourcing its network management, IT
infrastructure and distribution. This allowed Bharti to pull in expertise from around the globe to give it
a fast start to capitalize on the market opportunity, control capital expenditures as its subscriber
base ballooned, and keep operational costs down. At the same time, Bharti was very clear about its
core focus in five areas: customer management, people management and motivation, brand
management, financing and regulation.[17] Bharti has grown its subscriber base to over 100 million
subscribers in 2009.[18] Even at the height of the economic crisis in 2008, Bharti was able to grow
revenue by 37 percent, with net income up 26 percent.[19] Bharti is now leveraging its financial
strength to explore expansion into new markets such as media and entertainment, financial services
and healthcare.
Netflix: using analytics for intelligence and insight
The video rental business Netflix has built advanced analytics into its business model and
continuously leverages insight and analytics to create advantage. The Netflix recommendations
engine, for example, is instrumental in helping consumers make rental decisions. Based on user
ratings, Netflix ‘‘crunches’’ consumers’ rental history and film ratings to predict what else they’ll like.
Today, over half of a consumer’s video rental queues are generated through advanced analytic
algorithms. Building on its recommendation engine, Netflix has also been able to drive the so-called
long tail of video rental, with only 30 percent of its movie rentals from new releases, compared with
70 percent for Blockbuster.
Netflix also uses data mining and analytics to make pricing decisions with studios for
hard-to-market movies.[20] Since launching its online mail-order video rental in 1999, total Netflix
subscribers have grown at a compound annual rate of 64 percent, reaching an estimated 9.4 million
subscribers at the end of 2008.[21]
VOL. 38 NO. 4 2010 jSTRATEGY & LEADERSHIPj PAGE 23
For some new business models, this may require separate organizational structures as
Nestlé’s Nespresso business did. For others, such as Apple’s iPod, it requires that existing
models support and reinforce each other. Leaders will need to exhibit the following
characteristics:
B Innovative leadership. A focus on innovation and a willingness to break with the status quo
are key aspects of managing for the new while maintaining the old. This includes a
willingness to explore breakthrough innovations that challenge the existing business.
Strong leadership and perseverance help overcome inherent organizational inertia.
B Effective decisions to enable breakthrough innovation. In addition to innovative
leadership, breakthrough innovation requires a culture of innovation and an
entrepreneurial mindset. Well-known innovators like Google or Apple constantly nurture
an entrepreneurial spirit within their organizations. For example, Apple started flying a
pirate flag from its headquarters as a symbol of maintaining a ‘‘rebel spirit.’’
B Dynamic course correction. In today’s fast-paced environment, dynamic course
correction is required to bring new business models to market. Business models can
be designed on the ‘‘drawing board,’’ but only the application and testing in the market –
often through pilot projects – provides the insight needed to understand if and how the
business model will succeed.
This requires flexibility to respond quickly to signals from the external environment,
economic results, and partnership alignment. It involves constantly reviewing what is
working and what is not, and adapting key aspects of the model accordingly, especially in
fast-moving industries like the media industry. For example, Netflix continues to adapt its
business model based on new technologies, such as adding streaming video to its
subscription model based on changes in technology and customer preferences.
Operating model flexibility. A flexible operating model entails four elements:
B Lean and transparent processes – In an increasingly complex environment, process
optimization and end-to-end process visibility are required to build flexibility and the
capability to change. Lean Six Sigma approaches, for example, build the elements of
continuous improvement into the operational process, allowing the organization to
change and adapt the model based on new business model requirements.
B Flexible and scalable technology – While technology innovation often enables – or even
creates – new business models, flexibility in the underlying infrastructure is critical to
allowing an organization to shift and adapt its business model, and deliver a platform for
rapid growth and scaling.
B Globally optimized operations – This requires processes that are replicable and
repeatable across different geographies, assets that are optimized based on a clear
distinction of what is core and what is non-core, the ability to manage processes
end-to-end and extensive partnering.[22] Most importantly, global integration provides
organizations with access to the right skills at the right cost at the right time, which
supports the successful delivery of business model innovation.
B Asset and cost flexibility – Shifting from fixed to variable assets enables faster response to
changes in market conditions. This requires a clear understanding of and focus on core
activities, with a willingness to partner and collaborate for non-core activities.
‘‘ Leverage core capabilities and design consistency across all
dimensions of the business model, both internally and
externally, that build customer value. ’’
PAGE 24jSTRATEGY & LEADERSHIPj VOL. 38 NO. 4 2010
Conclusion
In an increasingly complex and fast-changing business environment, organizations have to
rethink and revisit their business model more frequently than in the past. They need to
continually tweak and enhance their models, especially during periods of economic turmoil
and increased industry transformation. But designing the right business model is only the
first step. To increase execution success, organizations need to ensure their business
models are aligned with customer value (and continually updated), are analytical (they gain
insight from differentiated intelligence), and are adaptable (they are enabled by a flexible
operating model).
Notes
1. IBM Corporation. ‘‘The enterprise of the future: IBM global CEO study,’’ May 2008, www-935.ibm.
com/services/us/gbs/bus/html/gbs-ceo-study-implications.html In a follow-up to the IBM Global
CEO Study, a joint team from the Carnegie Mellon Tepper School of Business and IBM analyzed the
2007 and 2008 financial performance (revenue growth and operating margin expansion) of 194
business model innovators participating in the original study, for which a complete set of data was
available.
2. The 28 best practice cases were selected from two key sources. We revisited the BusinessWeek
listing of the most innovative companies in the context of their performance in the 2008 economic
turmoil. ‘‘The world’s most innovative companies,’’ BusinessWeek, April 24, 2006, www.
businessweek.com/magazine/content/06_17/b3981401.htm We then added strong business
model innovators that were top performers during the economic downturn of 2008-2009. See
Berman, Saul, Steven Davidson, Sara Longworth and Amy Blitz, Succeeding in the New Economic
Environment: Focus on Value, Opportunity and Speed, IBM Corporation. 2009.
3. The literature on business model innovation is increasingly aligned on definitions and core
dimensions. See, for example: Osterwalder, A. and Y. Pigneur, Business Model Generation (OSF,
2009); Johnson, Mark, Clayton M. Christensen and Henning Kagerman. ‘‘Reinventing your business
model.’’ Harvard Business Review. December 2008.
4. Li & Fung acquisitions during the economic downturn include Wear Me Apparel in the USA and the
Miles Fashion Group in Germany. Inman, Daniel, ‘‘Li & Fung buys Wear Me Apparel for up to $402
million,’’ FinanceAsia.com. October 21, 2009, www.financeasia.com/article.aspx?CIaNID ¼ 115106
5. IBM Corporation, The Enterprise of the Future: IBM Global CEO Study 2008, IBM Corporation. May
2008, www-935.ibm.com/services/us/gbs/bus/html/gbs-ceo-study-implications.html. See Note 1.
6. De la Merced, Michael J. ‘‘Blockbuster hires help to restructure its debt,’’ The New York Times.
March 3, 2009, www.nytimes.com/2009/03/04/business/media/04blockbuster.html
7. CBS News, ‘‘Blockbuster will close up to 960 stores,’’ September 15, 2009, www.cbsnews.com/
stories/2009/09/15/business/main5313438.shtml
8. Colvin, Geoff, The Upside of the Downturn: Ten Management Strategies to Prevail in the Recession
and Thrive in the Aftermath. Portfolio, 2009. Hyundai also introduced a five-year warranty model and
was able to boost sales for August 2009 by 47 percent over the previous year, as many US car
manufacturers continued to struggle.
9. For selection of business model innovators, see Note 2. For a set of ‘‘counter-pairs,’’ we analyzed
companies that pursued business model innovation with limited success and compared them with
strong innovators.
10. The literature on business model innovation is increasingly aligned on definitions and core
dimensions. See, for example: Osterwalder, A. and Y. Pigneur. Business Model Generation. 2009;
Johnson, Mark, Clayton M. Christensen and Henning Kagerman, ‘‘Reinventing your business
model,’’ Harvard Business Review, December 2008.
11. Maynard, Micheline, ‘‘More cuts as United grounds its low-cost carrier,’’ The New York Times.
June 5, 2008, www.nytimes.com/2008/06/05/business/05air.html
12. IBM Corporation. The Enterprise of the Future: IBM Global CEO Study 2008, IBM Corporation, May
2008, www-935.ibm.com/services/us/gbs/bus/html/gbs-ceo-study-implications.html
VOL. 38 NO. 4 2010 jSTRATEGY & LEADERSHIPj PAGE 25
13. Saltmarsh, Matthew, ‘‘The sweet smell of success at Nestlé,’’ The New York Times, February 19,
2009, www.nytimes.com/2009/02/19/business/worldbusiness/19iht-nestle.4.20317285.html. Nestlé
does not publish Nespresso profit separately, but provides revenue and revenue growth
information: Nestlé press information, ‘‘The Avenches milestone in the Nespresso success story,’’
www.nestle.com/Resource.axd?Id ¼ CF489C89-60D4-4A6E-8590-091D6D5E0672
14. Interview with Dr William K. Fung, Group Managing Director, Li & Fung Ltd. IBM and 50 Lessons.
2009, www.preview20-935.events.ibm.com/services/us/gbs/bus/html/gbs-built-
for-change.html
15. Johnson, Mark, Clayton M. Christensen and Henning Kagerman, ‘‘Reinventing your business
model,’’ Harvard Business Review, December 2008.
16. O’Reilly, Charles, and Michael Tushman, ‘‘Ambidexterity as a dynamic capability: resolving the
innovator’s dilemma,’’ Research in Organizational Behavior, Volume 28 (2008), pp. 185-206. (Also
Harvard Business School Working Paper, No. 07-088, 2007.)
17. Interview with Manoj Kohli, Chief Executive Officer and Managing Director, Bharti Airtel Limited. IBM
and 50 Lessons. 2009, www.preview20-935.events.ibm.com/services/us/gbs/bus/html/gbs-built-
for-change.html
18. Leahy, Joe, ‘‘Bharti boosts rural Indian subscriber base,’’ Financial Times. July 23, 2009, www.ft.
com/cms/s/0/78de7afc-77ac-11de-9713-00144feabdc0.html
19. Bharti Web site, www.bharti.com/136.html?&tx_ttnews percent5Btt_newspercent5D ¼ 317&
tx_ttnews percent5BbackPid percent5D ¼ 116&cHash ¼ c9cb9d3479
20. Mullaney, Timothy, ‘‘Netflix – the mail-order movie house that clobbered Blockbuster,’’
BusinessWeek, May 25, 2006, www.businessweek.com/smallbiz/content/may2006/sb20060525_
268860.htm
21. Netflix Web site. http://ir.netflix.com/
22. Lubowe, Dave, Judith Cipollari, Patrick Antoine and Amy Blitz, The ROI of Globally Integrated
Operations: Strategies for Enabling Global Integration, IBM Corporation, 2009.
Corresponding author
Edward Giesen can be contacted at: edward.giesen@nl.ibm.com
PAGE 26jSTRATEGY & LEADERSHIPj VOL. 38 NO. 4 2010
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