Business Models: Who Invented it

What exactly is a business model and how can it be represented? What is the relationship between business model and corporate strategy? Are business model and strategy actually the same? This article shed light on what lies behind the term business model.

History of the business model concept

Business model is certainly one of the buzz words of recent years in connection with corporate strategy and strategic management. In the meantime, a separate division has emerged from the topic around business models.

In order to define the word business model, one has to look at the historical development of the term. Peter Drucker, American-Austrian economist and meanwhile deceased, laid the foundation for the idea of a business model in 1994. However, he does not explicitly mention the term “business model”, but only the theory of a company (original: Theory of a business). In this theory, Drucker describes that every company is based on certain assumptions. These assumptions make it what it is and thus shape operational behavior and all operational decisions. This includes a decisive influence on the question of what is right for the company and what is wrong. These assumptions define the market, i.e. who customers and clients are, who is to be regarded as a competitor, what their values are and how they behave.

Further assumptions concern technologies and thus the strengths and weaknesses of the company. In addition, these assumptions answer the question that is decisive for printers: What is the company actually paid for? Generally speaking, these are aspects that can be found primarily in the company’s external environment and thus influence its actions.

Drucker declares that this theory of a company, if clear, consistent and focused, is extremely strong and determines the success of the business project (see “Theory of a business”, Drucker, 1994, Havard Business Review).

The idea of a theory on which every company is based was taken up in 2002 by the American scientist Joan Magretta and defined for the first time as a “business model”. She sees its origins above all in the 1990s and strongly linked to the Internet boom. Magretta describes a business model as a story in which the assumptions made by printers are answered. This story is supposed to describe what the company does mainly to create a value chain (original: generation of a value chain) for the customer.

Magretta divides this value chain into two components. On the one hand in all the activities that deal with the implementation of goods. This includes the purchase of materials, processing and also the design of products. The second part deals with the sale of the manufactured goods. This includes the identification of customer segments, achieving the same, the sales process and product delivery (see “Why business models matter”, Magretta, 2002, Havard Business Review).

Joan Magretta was the first to describe the term business model in concrete terms and divided it into two sub-aspects. Her article was therefore the basis for further, varied research in this direction and many still frequently list your business model definition. Now, of course, the question arose how to present something as complex as a business model. Here the model of Alexander Osterwalder presented in the following section provides a concrete approach.

Alexander Osterwalder, Swiss business consultant, took up this two-part division of the business model in his thesis in 2004 and later also in his book “Business Model Generation” in 2010 and developed the Business Model Canvas, consisting of 9 building blocks.

Today, the canvas is one of the most accepted templates for representing a business model. The first building block describes the customer segments and thus all the people and groups that a company wants to reach with its business model. The second module focuses on the value proposition that the organization offers to these customers.

To bring us closer to the truth. This is where customer problems are solved and customer needs satisfied. This value proposition is brought to the various customer segments through customer channels, which include communication, distribution and sales channels (module 3). One
The business model also includes the establishment of customer relationships and the Maintenance of the same (module 4). This first part of the canvas suggests revenue sources to the business model (building block 5). This is achieved by successfully offering value creation to the customer segments.

The second part of the Business Model Canvas deals with the partial aspects of the business model that are necessary to successfully bring the value proposition to the customer. This includes the key resources (building block 6) in the form of people, materials and funds etc. as well as key activities (building block 7) that are executed based on the resources to create the value proposition. All the activities that are not carried out independently by a company or resources that have to be procured by outsiders are recorded in module 8, the key partnerships. The 9th building block describes the costs incurred to successfully set up the business model. Osterwalder defines the composition of the 9 building blocks as a business model and thus as a basic principle that an organization uses to generate, convey and maintain values.

You can find the template for the business model on the page of Ostwerwalders consulting firm Strategyzer. In another book, Osterwalder added the value proposition canvas to the approach.

Business models in strategic management

The terms strategy and business model are often used as synonyms, although they both have different meanings and strategy and business model pursue different goals. Magretta describes a business model as a system that represents the interaction between different parts of an organization. Strategy, on the other hand, describes the way in which a company can differentiate itself from its competitors. According to Magretta, several companies can have the same business model, but differentiation is only achieved through a unique business strategy. However, both are indispensable for the success of an entrepreneurial project and therefore there is a close correlation (see “Why business models matter”, Magretta, 2002, Havard Business Review).

In order to develop a business model, strategy managers must present a series of strategies that represent the differentiation of a product, including the price aspect, from the competition. They must also provide information on which customer segments are the target and how they are to be addressed. In practice, this also includes presenting a plan on how the capital should be invested and how the key competencies can be used to achieve a competitive advantage (see Hills, 2012, Strategic Management).

It becomes clear here that both aspects interact strongly and are interdependent, although they have different meanings. What business models mean in connection with innovation is examined in the first part of our series “The way to a structured evaluation approach for business models”.

TOM SPIKE deals intensively with the topic of business modelling in the Roadmap Business Model Innovation and conveys the contents in a business model master class.

If you would like to strategically position your company for the future and develop new business models, please call us: +49 (0)30 60 98 49 02 87 or use our contact form. We would be happy to visit you for a free initial consultation as part of an awareness session. Small and medium-sized companies can then use the “go-inno” innovation voucher for consultancy services and save 50 percent in costs.