Business models: Earlier/related concepts

While the term business model gained prominance in relationship with e-business and the Internet from the 1990s onwards, it was not exclusively used in this context. Moreover, related concepts have appeared for longer in management literature. Some examples by prominent management scholars are ‘theory of business’ (Drucker 1994), ‘business idea’ (Normann 1977 cited in Hedman and Kalling 2003) and ‘business concept’ (Hamel 2000).

Magretta (2002) refers to Peter Drucker’s ‘age-old questions’ when discussing what good business models are: Who is the customer? And what does the customer value? In his 1994 HBR article, Peter Drucker (1994) refers to the notion of a ‘theory of the business,’ which is very similar to the idea of organizations having a business model.

Drucker's theory of business refers the assumptions on which an organization has been built and is being run. These assumptions shape any organization's behaviour, dictate its decisions about what to do and what not to do, and define what the organization considers meaningful results. Drucker also warns that organizations run the risk that these assumptions no longer fit reality and that therefore their theory of the business no longer works.

See also earlier posts on Drucker's Theory of Business and Humphrey's TAM.

Drucker, P.F. 1994. "The Theory of the Business," Harvard Business Review (72:5), pp 95-104.
Hamel, G. 2000. Leading the Revolution: How to Thrive in Turbulent Times by Making Innovation a Way of Life. Boston, MA: Harvard Business School Press.
Hedman, J., and Kalling, T. 2003. "The Business Model Concept: Theoretical Underpinnings and Empirical Illustrations," European Journal of Information Systems (12:1), pp 49-59.
Magretta, J. 2002. "Why Business Models Matter," Harvard Business Review (80:5), pp 3-8.
Normann, R. 1977. Management for Growth. Chichester: John Wiley & Sons.

Early 'business model' models: Drucker's Theory of Business

In an earlier post, I described Humphrey's 'team action management' (TAM) business performance model as an early 'business model' model. Another model in this series is Drucker's 'Theory of the Business', which is described in his thirty-first HBR article (Sep 1994).

Drucker's theory of business consists of three parts: (1) assumptions about the environment of the organization, (2) assumptions about the specific mission of the organization, and (3) assumptions about the core competencies needed to accomplish the organization's mission.

Moreover, Drucker addresses four specifications of a valid theory of business:

1. The assumptions about environment, mission, and core competencies must fit reality.
2. The assumptions in all three areas have to fit one another.
3. The theory of business must be known and understood throughout the organization.
4. The theory of business has to be tested constantly.
   

Early 'business model' models: Humphrey's TAM

Most of us will know different frameworks or models for business models, like Osterwalder's business model canvas, Weill & Vitale's e-business models, Bouwman et al.'s STOF model, Gordijn's e3-value, etc. Most of these frameworks and models are relatively recent. Are there similar frameworks and frameworks from the past?

During a search for SWOT analysis, I came across a framework from Humphrey (see here). A further search on Humphrey brought me to his 'team action management' (TAM) business performance model (see here).

TAM describes six inter-related areas which have to be developed simultaneously for a business to be successful:

1. Products & services: what are we selling?
2. Process: how are we selling it?
3. Customer: to whom are we selling it?
4. Distribution: how does it reach them?
5. Finance: what are the prices, costs and investments?
6. Administration: how do we manage all this?

Another interesting fact about Humphrey is that he was a strong advocate of involving all employees in business planning and, therefore, promoted a systematic approach to produce and achieve a plan to accomplish a specific result, in a specific time, to a specific budget while working with a group of people.