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.
   

IBM study: Three ways to innovate your business model

An IBM study into business model innovation (Mar 2009) reveals three primary types of business model innovation: (1) industry model innovation, (2) revenue model innovation and (3) enterprise model innovation.

The study is based based upon an examination of 35 cases. It also which models generate success and which seem easier to implement. It concludes that with a sound strategy and strong execution, any of the paths can lead to success.

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.

Freelusion: The illusion of free

I keep wondering how many people still do not understand that "There Ain't No Such Thing As A Free Lunch." Mostly, we pay indirectly for all these free product and services as in the "razor and the razor blade" approach. Ever wondered why for many products and services the actual production costs are only a fraction of the price? Who pays for the advertisements on "free" news sites? So every time you see an advertisement of one of the products you buy on a web page, consider yourself to be a paying customer. ;-)

What can be the case is that some end up paying the lunch of other. This is model that has been around for a long time and people may be quite willing to do so, as, for example, is the case with charity. But one may wonder how sustainable this, as a commercial model, is in the long-term.

For example, many people have been buying "high-quality" paper newspapers. Nowadays, those who do not care about this kind of quality read their news "for free" online and may be paying for it via their car insurance. So, this will ultimately require that those who do value these "high-quality" newspapers have to start paying the actual costs without cross-subsidizing and they may pay either via their subscription or via their car insurance. So, the internet may in fact be making people pay for what they actually consume!

Business model experimentation

A while ago, I wrote about business model experimentation as one of the requirements for Business Model Management (see this post). It is advisable to experiment with new business models first, to test them and to try out different models and variations. One of the advocates of business model experimentation is Chesbrough in his discussion of open business models.

In a recent HBR article (Feb. 2009) titled 'How to Design Smart Business Experiments,' Davenport argues that managers should follow a more rigorous approach to business experiments. He promotes decision-making based on scientifically valid, quantitative methods made possible by new, broadly available software and some straightforward investments to build capabilities. Davenport also states that the scientific method is not well suited to assess a major change in business models. It is more suited for strategy execution than strategy formulation.

Still, I am already looking forward to seeing paradigm discussion emerge in the board room. ;-)

Service Innovation and Business Models

Western economies are highly dependent on service innovation for their growth and employment. An important driver for economic growth is, therefore, the development of new, innovative services like electronic services, mobile end-user services, new financial or personalized services. Service innovation joins four trends that currently shape the western economies: the growing importance of services, the need for innovation, changes in consumer and business markets, and the advancements in information and communication technology (ICT).

See the publication in the business model book for mobile services here.

Design Trade-offs for Electronic Intermediaries

Electronic commerce offers intermediaries new opportunities for facilitating the transfer of information, goods and services between business customers and suppliers. Designing exchanges is a complex undertaking because of the many design options on the one hand and the diverse, and sometimes conflicting, interests of customers, suppliers and the intermediary to be considered on the other. Our research provides constructive support for balancing interests beyond simple prescriptions like 'creating win-win situations.' We developed an exchange design model and patterns focusing on trade-offs for electronic intermediaries based upon four in-depth case studies.

See the publication in Electronic Markets here.