Business model shift or drift?

It has been recognized that business models need to be adaptive and may change incrementally or radically, in particular in the early stages of a new venture, and need to be transformed when faced with disruptive innovations or changes in the environment.

However, how would one differentiate between the need to change the business model and the fact that often events take their own way and start drifting? And how to make a choice between sticking to the initial model or committing yourself to the new emerging model?

For example, in my work with a start-up company developing a potentially very innovative product, they need to do consulting to keep a cash flow. This consultancy is very successful but also time consuming, keeping then away from making major progress with their product. Should they maybe become a consultancy company?

In this area we can probably learn from strategic management, so a quick check of Wikipedia brings us to ‘strategic change’. Relevant concepts discussed there are ‘strategic drift’, a gradual change that occurs so subtly that it is not noticed until it is too late (Handy, 1989) and ‘strategic inflection point,’ a time in the life of a business when its fundamentals are about to change (Grove, 1999).

However, while this literature and the cases may give us some insight on how business model transformation for more established companies, it seems less suited for the more entrepreneurial start-up companies who operate much more in a greenfield scenario and have to deal with the fact that there is no proven, established business model to start with.

Here are some initial thought that may be considered in making a choice for a business model or business model change in a start-up scenario when it is it is hard to predict which business model is better in terms of profit or success and when you have to decide whether you should stick to your initial business model or commit yourself to a new business model.

First think about consistency (and synergy). Are the elements of the business model consistent with each other. Do they fit together and if possible reinforce each other so that they create synergies. This follows the age-old credo that the whole is more than the parts. [updated 15 October 2010]

Second think about scalability: Choose the one that has the biggest potential in terms of what can happen if it really takes off. In the previous example, it is the product model that can turn the start-up into a large company much faster than the consultancy model.

Third think about flexibility. Choose the business model that still keeps the most options open and is most easy to adapt until you know more about your customers, see also Osterwalder’s post on customer development.

Fourth think about innovativity. Choose the business model that differs most from existing business models, in particular if you need to differentiate yourself or what you want to achieve or offer is very different from the existing situation.

Fifth think about simplicity. Choose the business model that is the most straight forward. Complexity will follow automatically when you start going into the implementation details.

Sixth think about repeatability. Will it be possible to turn the business model into a formula that can be repeated. This makes it possible to grow outside of the current product/market combination. It may even be possible to enter completely unrelated industries where the same business model can be applied. [updated 15 October 2010]

Innovating Your Business Model

Mark Johnson, Innosight chairman, on how you can seize the white space. See also the book "Seizing the White Space: Business Model Innovation for Growth and Renewal," more information can be found here.

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.

Business models 101

Watch Alexander Osterwalder, the creator of the Business model Canvas, explain the basics of business models, the three steps of why, what and how, in this video.

Sourcing business and software services

With the advancement of Service-Oriented Architecture in the technical and business domain, the management & engineering of services requires a thorough and systematic understanding of the service lifecycle for both business and software services.

However, while service-oriented approaches acknowledge the importance of the service ecosystem, service lifecycle models are typically internally focused, paying limited attention to processes related to offering services to or using services from other actors.

In this paper, we address this need by discussing the relations between a comprehensive service lifecycle approach for service management & engineering and the sourcing & purchasing of services. In particular we pay attention to:

• the similarities and differences between sourcing business and software services,
• the alignment between service management & engineering and sourcing & purchasing,
• the role of sourcing in the transformation of an organization towards a service-oriented paradigm,
• the role of architectural approaches to sourcing in this transformation,
• and the sourcing of specific services at different levels of granularity.

See here for more information.

On the ‘value’ in business model definitions

As ‘value’ is one of the most common term in business model definitions, the obvious question is what is meant with value? Surprisingly, it is almost never further elaborated or discussed in business model books or articles. In general the term ‘value’ is used to refer to ‘the quality (positive or negative) that renders something desirable or valuable’ (Wordnet 3.0) or ‘something (as a principle or quality) intrinsically valuable or desirable’ (Merriam-Webster).

It seems that when business model definitions refer to value, they mostly mean customer value (such as, Afuah, 2004; Dubosson-Torbay, Osterwalder, & Pigneur, 2002; Tapscott, 2001), while some refer to value for both the customer and the company (e.g., Bouwman, De Vos, & Haaker, 2008; Johnson, 2010). Mostly the value for the company (and other providers in the case of an inter-organizational network) seems to be implicit in the definition by referring to capturing (customer) value. This raises the question what is meant with customer value.

Weinstein and Johnson (1999) state that the concept of customer value is as old as ancient trade practices and refer to the early barter transactions where buyers would carefully evaluate the offerings of sellers. Buyers would only agree to close a deal when the benefits (products received) compared to the cost (items traded) were perceived as being a fair (or better) value. Hence, customer value is ‘the satisfaction of customer requirements at the least total cost of acquisition, ownership, and use’ (De Rose, 1994 cited in ; Weinstein & Johnson, 1999)

Woodruff (1997) defines customer value as ‘a customer's perceived preference for and evaluation of those product attributes, attribute performances, and consequences arising from use that facilitate (or block) achieving the customer's goals and purposes in use situations.’ Woodruff proposes a ‘customer value hierarchy,’ which is a means-end type of model where the desired customer value moves from desired product attributes and attribute performances, via desired consequences in use situations, to customers’ goals and purposes. Woodruff also notes that the use situation plays a critical role in customer evaluation as well as in desires. This means that customer value is highly subjective and contextualized.

Customer value is also described as value-in-use (or use value), which is value created with and determined by the user during the consumption process (Bowman & Ambrosini, 2000; Grönroos, 2006; Lusch & Vargo, 2006). This is differentiated from value-in-exchange (or exchange value), which is value embedded in the product itself (i.e. added during the production process) and determined at the point of exchange (Bowman & Ambrosini, 2000; Grönroos, 2006; Lusch & Vargo, 2006). This brings us back to the definition of business models, as creating value relates to value-in-use and capturing value relates to value-in-exchange (Priem, 2007).

Afuah, A. (2004). Business models: A strategic management approach. New York, NY: McGraw-Hill/Irwin.
Bouwman, H., De Vos, H., & Haaker, T. (2008). Mobile service innovation and business models. Heidelberg, Germany: Springer.
Bowman, C., & Ambrosini, V. (2000). Value creation versus value capture: Towards a coherent definition of value in strategy. British Journal of Management, 11(1), 1-15.
De Rose, L. (1994). The value network: Integrating the five critical processes that create customer satisfaction. New York, NY: AMACOM.
Dubosson-Torbay, M., Osterwalder, A., & Pigneur, Y. (2002). E-business model design, classification, and measurements. Thunderbird International Business Review, 44(1), 5-23.
Grönroos, C. (2006). Adopting a service logic for marketing. Marketing Theory, 6(3), 317-333.
Johnson, M. W. (2010). Seizing the white space: Business model innovation for growth and renewal. Boston, MA: Harvard Business Press.
Lusch, R. F., & Vargo, S. L. (2006). Service-dominant logic: Reactions, reflections and refinements. Marketing Theory, 6(3), 281-288.
Priem, R. L. (2007). A consumer perspective on value creation. Academy of Management Review, 32(1), 219-235.
Tapscott, D. (2001). Rethinking strategy in a networked world: Or why Michael Porter is wrong about the Internet. Strategy + Business, 24, 1-8.
Weinstein, A., & Johnson, W. C. (1999). Designing and delivering superior customer value: Concepts, cases and applications. Boca Raton, FL: CRC Press.
Woodruff, R. (1997). Customer value: The next source for competitive advantage. Journal of the Academy of Marketing Science, 25(2), 139-153.

Understanding Shared Services : An exploration of the IS literature

In a competitive environment, companies continuously innovate to offer superior services at lower costs. ‘Shared services’ have been extensively adopted in practice as one means for improving organisational performance.

Shared services is considered most appropriate for support functions, and is widely adopted in Human Resource Management, Finance and Accounting; more recently being employed across the Information Systems function. IS applications and infrastructure are an important enabler and driver of shared services in all functional areas. As computer based corporate information systems have become de facto and the internet pervasive and increasingly the backbone of administrative systems, the technical impediments to sharing have come down dramatically.

As this trend continues, CIOs and IT professionals will need a deeper understanding of the shared services phenomenon and its implications. The advent of shared services has consequential implications for the IS academic discipline. Yet, archival analysis of IS the academic literature reveals that shared services, though mentioned in more than 100 articles, has received little in depth attention.

This paper is the first attempt to investigate and report on the current status of shared services in the IS literature. The paper presents detailed review of literature from main IS journals and conferences, findings evidencing a lack of focus and definitions and objectives lacking conceptual rigour. The paper concludes with a tentative operational definition, a list of perceived main objectives of shared services, and an agenda for related future research.

See here for more information.