TOWARDS A VISION OF BUSINESS MODEL COMPONENTS

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MASTER THESIS NICK HOOIJENGA

TOWARDS A VISION OF BUSINESS MODEL COMPONENTS



University of Amsterdam – Faculty of Science

Information Studies: Business Information Systems

Student ID 10677887

Academic year 2014-2015

Supervisor / first examiner dr. Erik J. de Vries _{e.j.devries@uva.nl} _{Signature: ………..….}

Second examiner dr. Dick Heinhuis _{d.heinhuis@uva.nl} _{Signature: ………..….}

MSc graduate student Nick Hooijenga _{nick@meteen.info} _{Signature: ………..….}

Keywords. Business models, disruptive business models, influence ICT, technology, business model components, combining business model components, customer value proposition, business model list.

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"

If we knew what it was we were doing, it would not be called research, would it?”

— Albert Einstein

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Abstract

Our organizations are changing under the influence of technology. Business models are described in theory, yet there is still no consensus on an academic definition. New disruptive business models are changing our

organizations, which raises the question: how can other organizations keep up? This study has contributed to the scientific understanding of business models by identifying general business model components and introducing a thought experiment of modularity to the equation. The literature is examined to establish a baseline on business models and which component should be in a business model. Moreover, close attention was paid to whether the theory hinted towards a need for modularity in business models.

Having established a theoretical base, a conceptual modular business model was created, based on the theory. The conceptual model was explained in semi-structured interviews and used to test whether the need for modularity in business models was there in practice. Organizations recognized the components and started talking in terms of business model components and modularity, moreover the concept was accepted in practice, making the thought experiment of this study a success. Further research is needed in modular business models, to come to a complete model with the potential to change organizations forever.

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Acknowledgements

Though my path to the University of Amsterdam has been long, it has been a dream come true and an inspiring adventure all at once, an adventure which I shall never forget. I owe my success in life to many people, some of which are unfortunately, no longer amongst us. Without the believe and support of some special people in my life, I would never have come this far.

I owe this thesis to the strongest women there is, Clemence Hooijenga. Mom, we’ve been through much together, without your continuous support I could have never pulled this off. Sieger Hooijenga, dad, I am grateful that I have been given this opportunity in life to share with you what I am doing and that I could do you proud. I want to express my gratitude to both of you for always believing in me, always supporting me, and always helping me to get further: whether education, business or life itself.

Dennis Hooijenga and Moniek van den Acker, I couldn’t have wished for another brother and sister (in law), I am glad we’ve had our moments to talk the stress away and appreciate the unmissable assists in obtaining two entrances to two companies otherwise out of my reach. Dear mom, dad, brother and sister in law, thank you for always supporting and believing in me. It has been a very tough period with many ups and downs, rain and shine, but as we say in Dutch: “na regen komt zonneschijn1_{.” Kyle Keersemaker, my friend/brother from another} mother, thank you for understanding my lack of time and your continued support and donated time. Words can simply not express the gratitude for the continuous support and encouragement given by those close to me, your support has kept me going through this period, kept my business alive, and helped me finish my education and in achieving my goals.

A special thank you to my supervisor Erik de Vries, who’s guidance, reserved time and contributions have helped me get started, kept me going in the right direction, and helped me to evolve my research into a Master thesis which makes me proud.

To all of my interviewees: thank you for reserving your precious time to contribute to my research!

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Acronyms

RQ Research Question

RQ#Sn Research Question Sub-question # <number> RG#n Research Goal # <number>

BMC Business Model Canvas. CVP Customer Value Proposition

VC Venture Capital (investment) VoIP Voice-over-IP (VoIP)

AI Appreciative Inquiry B2C Business to Consumer B2B Business to Business

PR Public Relations

List of Figures

Figure 1. Business model components (adopted from Shafer et al., 2005, p. 4). ... 1

Figure 2. Business Model Canvas (adopted from Osterwalder et al., 2011, p. 44). ... 2

Figure 3. Contextual model of business model components. ... 3

Figure 4. Relationship CVP & Components. ... 7

Figure 5. Comparison of traditional and modern business (adopted from Al-Debei & Avison, 2010, p. 369). ... 9

Figure 6. Impact on Apple after changing their business model (adopted from Amit & Zott, 2010, p. 4). ... 10

Figure 7 The 4-D Model of Appreciative Inquiry (adopted from Bright et al., 2006, p. 291). ... 94

Figure 8. Business model ontology (adopted from Osterwalder, 2004, p. 44). ... 94

Figure 9. The conceptual modular business model. ... 94

List of Tables

Table 1. Chapter reading guide. ... 5

Table 2. Nine business model building blocks (adopted from Osterwalder, 2004, p. 43). ... 95

Table 3. Discovered business models in theory. ... 97

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1.0 Introduction

The empirical body of knowledge on business models does not provide a singular definition of business models, most definitions seem to focus on production. Sanderson (2014) quoted from Weill, Malone, D’Urso, Herman, and Woerner (2005) that “despite the frequent use of and referrals made to business models by academics and managers, that the concept itself is seldom studied” (p. 9). Shafer, Smith, and Linder (2005) proposed a

framework based on four commonly shared definitions: (1) Strategic choices (2) Value network (3) Create value and (4) Capture value. The authors in fact found 42 business model components for traditional business models, and constructed a model containing these components. Figure 1 displays the 20 business models components which appeared at least 2 times in the literature examined by the authors.

Figure 1. Business model components (adopted from Shafer et al., 2005, p. 4).

Zott, Amit, and Massa (2011) discovered that business models literature shares common themes, one of which is that “business models seek to explain how value is created, not just how it is captured” (p. 1019). After

examining the current body of knowledge on business models, the authors conclude in their paper that three concepts can be investigated individually and in relation to each other, under the umbrella theme business models:

1. E-Business model archetypes 2. Business model as activity system

3. Business model as cost/revenue architecture

(p. 1039). Before attempting to research business models further, a definition of business models is required, since there is currently no single definition in the literature which captures the true definition of business models. The working definition of a business model in this paper is as follows:

A business model captures how profit is gained through a repeatable process, adding value for the customer.

This definition is based on the definitions of (Johnson, Christensen, & Kagermann, 2008; Osterwalder, Pigneur, Oliveira, & Ferreira, 2011; Sanderson, 2014; Zeleti, Ojo, & Curry, 2014; Zott et al., 2011). According to Shafer et al. (2005) a company built for making profit, must always make profit in order to survive, which implies that they need to do both: create value and to capture that value in order to generate profit. To do so, the concept of value creation and capturing is done through a value network (p. 4). To create a shared ontic understanding of business models, the Business Model Canvas (BMC), see figure 2, is introduced by Osterwalder et al. (2011) in their book, enabling the creation and sharing of a business model through a shared language (p. 15). The business model (figure 2) is made up out of 9 distinctive elements, it can be used to both: capture the current situation (as-is) and/or the new business model situation (to-be). Economical logics on product pricing and costs are found in all business models papers.

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Figure 2. Business Model Canvas (adopted from Osterwalder et al., 2011, p. 44).

1.1 Why define a business model

 Why should we define a business model? A good reason for defining business models is to assist a new or existing business in thinking of how to deliver added value for the customer, any good model provides insights into the targeted customers, competitors and most importantly: the forecasted effects on the company budgets (Zott & Amit, 2010).

“The starting point of any business model is the customer value of a product or service that an individual company or network of companies has to offer and which will satisfy customer demands.”

(Bouwman, De Vos, & Haaker, 2008, p. 36).

A business model is always a life document, which needs to be updated over time due to external influences e.g.: changing markets, customer needs. De Reuver, Bouwman, and MacInnes (2007) confirm this statement and further add to it that revisions in business models are needed to fit changing technology and regulatory regimes.  What should be in a business model? All authors write about roughly the same components, but in different

words, in an attempt to simplify what should be in a business model 4 components were identified as follows:  A customer value proposition (CVP), which is targeted at a specific set of target users/groups (Faber

et al., 2003) which can be related to value proposition and customer segments in the model of Osterwalder et al. (2011, p. 44).

 A profit formula, describing the creation of value for the company by using revenue modes, costs structures, margins and inventory turnover (Johnson et al., 2008, p. 58). This can be related to cost structure and revenue streams in the model of Osterwalder et al. (2011, p. 44).

 Key business process capturing the repeatable operational and managerial process allowing repeatable CVP delivery. Key business processes include recurrent tasks such as: training, development,

manufacturing, budgeting, planning, sales and service (Johnson et al., 2008, p. 61). This point fits in the key activities part of the business model canvas of Osterwalder et al. (2011, p. 44).

 Key resources such as people, technology, products, facilities, equipment, channels which are required in-order-to deliver the CVP (Johnson et al., 2008, p. 61). The key resources can be related to key partners, key resources and channels in the model of Osterwalder et al. (2011, p. 44).

The customer value proposition is by far seen the most important component throughout the literature, “It’s not possible to invent or reinvest a business model without first identifying a clear customer value proposition” (Johnson et al., 2008, p. 61). This is in line with Bouwman et al. (2008) and the author of this paper. The creation of a perfect CVP is by far the hardest thing to do, being an entrepreneur I recognized this myself.

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Logically: by focusing on lots of things, you can’t do one particular really well (Johnson et al., 2008, p. 63). Business models are argued to be reusable if the components: profit formula, key resources and key business process don’t change all too much (Johnson et al., 2008, p. 66).

1.2 Thought experiment

If business models are built-up from components, the thought experiment of this paper argues that these components of business models could be reused in a different context, to create a new value proposition. A business model is then a relational context, in which the components fulfill the need to either provide value in an economical context, market need, or to solve a social problem. A contextual model is provided in figure 3. A business model only has a right to exist if there is an implicit/explicit need or an implicit/explicit problem, without one of these two ingredients the business model simply cannot exist. Note: a ‘need’ or ‘problem’ can also be created, take ‘the revolutionary iPod’ or even better: the iPhone introduced by Apple Inc. as an example.

Figure 3. Contextual model of business model components.

1.3 Then what is a business model?

A business model is a combination of related components which together, are able to create added value for the target customer, in-order-to satisfy economic or social strategic objectives (Zott et al., 2011, pp. 2028-2029). It is a scalable model describing how value is created for the customer (social or economic) and the exploiting business, in a repeatable manner. Business models are created by combining related components, in the thought experiment the components were identified as follows:

 Customer component  Financial component  Business components

The components consist of underlying information, illustrated in figure 3. In the finance component, the revenue and costs are specified clearly, helping the entrepreneur and also allowing for Venture Capital, by providing:

 (Estimated) revenue stream  (Estimated) costs

The business components, required to generate a CVP, are to be captured in the business components section of a business model. Components of a business model are well defined in the theory, the components include: resources (people, items, equipment, facilities), distribution channels (transporters, digital distribution), activities (development, manufacturing, training, marketing) (Osterwalder et al., 2011). The financial aspect is dependent on the business components change. Furthermore the CVP is to be reached by the combination of business components, hence also influencing the customer component.

 How business models create economic value. Due to the increasing user acceptance and internet

Business

Model

Customer •CVP •Objectives Business Components •Process •Resources •Distribution channels Finance •Revenue •Costs aspect

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made (Bernd W Wirtz, Mory, & Piehler, 2014). The world wide web and advances in technology together paved way for new nontraditional business models. However, IT is essentially a transport mechanism used to carry our information in the form of bits and bytes over a digital highway, that said, IT is unfortunately prone to

replication at low costs, which is dangerous because today many of our business activities and process are embedded in software (Carr, 2003, p. 4).

Chesbrough (2010, p. 1) claims that technology by itself has no economic value, as was also made clear by Carr (2003). Business commercializes technology and ideas by means of their business models, by using a suitable business model, the value of technologies can be realized (Chesbrough, 2010, p. 2). A business model is built through research and development, then tested and finally commercially exploited. Business models however do not remain stable over time and are prone to constant revision throughout all phases from the development to exploitation (De Reuver et al., 2007), therefore there is a need for modular business models which can be adjusted with ease. According to Osterwalder et al. (2011) there is still a lot to be done and learned in the field of business models, on the back of their book they state that:

“Disruptive new business models are emblematic of our generation. Yet they remain poorly understood, even as they transform competitive landscapes across industries.”

This paper contributes to the understanding of business models by means of identifying the general business model components. Furthermore this research aims to (a) define usable components for business models, and, (b) experiment with combining existing components to create a new CVP. Additionally, the research will focus on new CVPs and their relation to the other components. Also, new forms of economies are examined and listed in table 4, for example: trading economies, social return on investment, social business cases and business models for public value creation.

1.4 Goals of this research

The research goals (RG#n) are defined as follows:

 RG#1 Contribute to the scientific body of knowledge on business models, by introducing a (new) concept of combining business model components.

 RG#2 Provide a list of discovered business model components.

The list will contain: short descriptions and references to business models.

 RG#3 Prove that the thought experiment is perceived as useful or recognizable by organizations. Interviews held prove the discovered business model components, or disprove them, in order to provide an initial overview of how companies can combine existing components to create a new CVP.

1.4.1 Research Question

This paper answers the main research question:

How can business model components be reused to create a new Customer Value Proposition?

1.4.2 Sub-questions

Nine sub-questions (#Sn) are proposed in-order-to answer the main research question (RQ). The sub-questions are defined as follows:

RQS#1 What is a business model?

RQS#2 Which business model components are currently described in theory? RQS#3 When are business models (not) linked to strategy?

RQS#4 Which customer objectives are currently found in business models?

RQS#5 Which relationship can be found between the components and the financial aspects? RQS#6 How are the identified components used in practice?

RQS#7 How do ICT innovations influence business models?

RQS#8 How are the business models components perceived in practice by companies? RQS#9 How are new trends like trade-economies influencing business models?

1.5 Thesis structure

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In order to understand the research, a reading guide is provided in table 1.

Chapter Description Input from

O

n

to

lo

gy 1.0 Introduction Introduction to business models and the research. Literature 2.0 Methodology Used methods to gather results. Literature

R

es

ea

rc

h _{3.0 Literature} Definitions on business model components, strategy,

disruptive models and customer value propositions. Literature

4.0 Analysis Field testing defined theoretical modular business _{model and answering research questions.} Literature and _{Qualitative interview}

Wr

ap

-up 5.0 Conclusion Conclusion and the answer to the research question. Paper 6.0 Discussion Limitations, unanswered questions and suggestions of _{what can be done from here on.} Paper

Table 1. Chapter reading guide.

2.0 Methodology

2.1 Literature research

Building upon the business model theory, the thought experiment of combining components to create a (new) customer value proposition is discussed: giving rise to a new vision of components which together form business models and provide a customer value proposition. Using a structured explorative research, this thesis found relevant literature within the business model domain, business domain and ICT domain, all used keywords and other ways linking back to how the theory is found was carefully logging, as can be found in Annex VI. Leading authorities in the business model field were discovered during the explorative literature research: dr. Raffi Amit2 and dr. Christoph Zott3_{, who both were able to claim a place in big and famous journals such as the Strategic} Management Journal publishing articles about business models.

Literature was initially selected which was based on business models in general, in order to get a better understanding. Found theory was used to establish a definition and a starting point, after starting, the found theory was used to establish a base line on the topic, the selection process became more focused and was starting to shape a clearer vision of modular, component oriented design for business models. The extensive literature study has provided information on business models, a definition on what they are, which components are found in theory, the link of business models with strategy and briefly touched upon new business model trends: also leading to a table with discovered business models and new business model economies, the theory served as a basis for the qualitative interviews.

2.2 Qualitative interviews

Qualitative research is used in this study to obtain critical information on the subject, transcripts (translated from Dutch to English) are provided to strengthen the research. Before the interview takes place, the interviewee is asked to sign a data consent form, allowing the use of the data for the purpose of this thesis research, and allowing the interviewee to choose whether the use of the company name, company logo and individual name are allowed in the public version of this thesis. The theoretical thought experiment shall be discussed with actual businesses, using a (form of) business models. Also the findings are to be discussed with businesses (and business owners, whenever possible) in-order-to answer the main research question and to prove the set up thought experiment. Disruptive and/or interesting firms are to be contacted and interviewed to get answers for the propositions posed after the literature review in order to draw conclusions and to strengthen the theoretical research part of this thesis. Information will be gathered by means of combining appreciative inquiry and semi-structured interviews. It is expected that this will be both hard and tied to restrictions of the interviewees. Appreciative Inquiry is well suited for (innovative) firms, where the entrepreneur or employee will be given room to talk (often passionately) about his or her business and business model. The transcript will contain

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only relevant parts of the interviews, where explicitly allowed, the interviews are to be recorded with the consent of the organization. Appreciative Inquiry (AI) invokes effects of appreciation through inquiry, as the name suggest, with the intention to learn, explore, discover, and authentically understand other perspectives. By means of curious attitude a researcher momentarily suspends own judgments, allowing openness to new possibilities, opportunities and or potential (Bright, Cooperrider, & Galloway, 2006, p. 286).

“The intention of an appreciative inquiry is to engage people in particular conversations that literally

appreciate (operationally) the strength of relationships within and across an organization. As a by-product, what they appreciate (epistemologically) is also enhanced.”

(Bright et al., 2006, p. 287).

Asking questions and showing new discovered results through the thought experiment in an appreciative inquiry helps in exploring the new possibilities of modular business models. The interviews are to be done by using the 4-D model of Appreciative Inquiry, and semi-structured interviews. Figure 7 (Annex XII) illustrates the 4-D model of Appreciative Inquiry. The set-up for the inquiry is to follow the defined structure, deviating from it where necessary, as follows:

2.2.1 Discover phase

Starting the interview, an introduction of this research is to be provided, along with its intended goals and contributions to science, after which three phases of the 4-D model (figure 7, Annex XII) are to be exploited. In the first phase of AI, the conversational aim is to invite the interviewee to talk about factors that have made past achievements possible, which likely leads to awareness of unnoticed strengths, and potentially has the

interviewee talking about parts of the business model. Moreover, this experience is assumed to generate a feeling of safety and more importantly, trust, meaning that the interviewee opens up to talk about the future (Bright et al., 2006, pp. 291-292).

2.2.2 Dream phase

Moving towards the dream phase gradually, the interviewee is asked to think out loud on an ideal future for them, connecting the past, present and future events by taking the best moments from the past, to try and think about how the future could be shaped. The talk is supposed to create room for a discussion on a modular

approach of business models, and what it could mean for them, others and science in general (Bright et al., 2006, p. 292).

2.2.3 Design phase

After having reflected on the past and present, and having thought about a future, concrete ideas are to be formulated. Taking the concept of modular business models to the discussion and trying to find out relevance for the interviewee of the company, discussing missing components and the perceived usefulness of the modular business model. It will be attempted to have the interviewee talk as much as possible. All gathered data is encoded using the interview encoding sheet found in Annex III.

2.2.4 Semi-structured phase / wrap-up

Keeping in mind that the research questions need to be answered, having used the AI interview techniques this research will attempt to answer the remaining research questions and formulated proposition by means of a semi-structured interview. The appreciative interview techniques are used to get the interviewee in a sharing mode, as the interviewee’s trust must be gained. Finally, In chapter 4, paragraph 2 the set-up of the interviews is provided.

2.3 Validity

To prove this research is valid, references have been made throughout the theory to other researchers, to strengthen the theory. How all theory has been found was logged in Annex VI. Interviews (𝑛 = 11) have been taken at different company types, where possible, and all interviews were done by using the same interview protocol and same exact transcript as found in Annex II. Which companies (and how) were approached is logged in Annex V. Before every interview, the exact same explanation was given and a consent form (refer to Annex X) was signed by both: the interviewee and interviewer, moreover: all interviews have been recorded and saved as digital MP3 files, from those recordings, transcripts have been written, these transcripts are saved in Annex IV. This thesis builds on other well-known research and has tested new claims in practice by asking questions in

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semi-structured interviews, deviating from the structure where necessary, always using the checklist as provided in the interview transcript (refer to Annex II) to ensure equal quality. Every interview was interpreted using the same interview encoding sheet found in Annex III. A lot of effort has been put into making the research as transparent as possible ensuring repeatability.

The entire research approach has been methodological, to ensure the validity by keeping all gathered data as transparent as possible: starting from the literature, this thesis deductively produced a conceptual modular business model (figure 9, Annex VIII & Annex XII) and yielded questions in the form of propositions, which ultimately lead to a coding scheme. Taking the interviews in Dutch and partially transcribing them into English yielded raw data which was encoded using an interview encoding sheet (Annex III). Once complete, overlapping themes were found and logged (Annex VII). From the recorded interview output (Annex IV) and overlapping themes (Annex VII), the research took an inductive approach to answer the propositions, research questions and deliver a contribution to the theory.

3.0 Literature study on business models

3.1 Components described in theory

A challenge of a business model is to transform the model components into operational decisions, but also to experiment with strategic decisions within the constraints of the business model (Morris, Schindehutte, & Allen, 2005, p. 9). Innovating the business models is difficult and important: business model innovation can help companies to cross the pitfalls of earlier business models, also revitalizing profits and encouraging growth. Change will go hand in hand with barriers and hurdles, the current models and new models will need to be maintained together, until the new business model is complete accepted (Chesbrough, 2010, p. 362). Not in every situation, a new model is needed, an example is provided by Johnson et al. (2008, p. 66): the old model will be fitting as long as the new CVP can be fulfilled using: the current profit formula, most (or all) of the current resources and processes, the same core metrics, rules and norms components (p. 66).

”You don’t always need a new business model to capitalize on a game changing opportunity. Sometimes,

as P&G did with its Swiffer, a company finds that its current model is revolutionary in a new market.”

(Johnson et al., 2008, p. 66).

The text is hinting that business models are re-usable, and are built up from related component as was described in the thought experiment of this paper.

This paper identified three basic and related components, the customer component contains the CVP, which is generated by the execution of the combined components, see figure 4 (Annex XII), in which the combined components is a combination of the financial component and the business components. Combe, Mason, and Mouzas (2012) state that manufacturing, distributing, and product/service selling companies strive to develop a flexible business model due to 1. an enormous growth in production capacity of competitors and 2. in order utilize the business network resources most efficiently. For the first problem, the authors argue that a customer preference through branding and customer relationship management is required. Thus a need for creating a new CVP through combined business model components can be identified, as it will aid businesses in becoming flexible enough. A flexible business model needs to be modular, taking the personal computer as an example, individual interrelated components (e.g. hard drive, video card, central processing unit, etc.) work together, though designed independently, they function as a whole (Kodama, 2004).

All business models contain a CVP, this CVP contains the value stream for the business partners and the buyers. Moreover a financial component: the revenue stream is also found in the business model, which is a plan indicating how the business is going to generate revenue. The design of the supply chain for the business is also found in a business model: containing various logistical stream, it can be found in the business component:

Figure 4. Relationship CVP & Components.

Generated by Lead to . CVP Combined Components

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customer(s), and a basic strategy to win customers over, it is critical to decide whether the market is saturated or not, if a firm is unable to attract customers then it will not be able to compete, in other words: the value

proposition will not be strong. (Richardson, 2008, pp. 138-139). Good examples of value propositions

potentially leading to a sound competitive advantage are: “superior, or differentiated offering, or perhaps lower costs in serving the target market” (Richardson, 2008, p. 139).

The financial component is linked to both: the customer component and the business component, it contains the revenue and cost aspects. The costs aspects depend on the customer objectives, business process, resources and distribution. Distributing digital content is far cheaper than distributing physical goods. In the customer objectives components an emphasis on a strategy with high or low volumes could be decided upon, changing the sourcing costs of goods, in higher volumes, higher discounts can be offered by suppliers, leading to a better margin for example (Morris et al., 2005, p. 730). Morris et al. (2005, p. 730) describe the financial component of this research as an economic model in their theory, which provides the business with a profit logic. However, a value proposition does not necessarily have to be in terms of monetary profit: social or economic value can also be considered a value proposition, the reduction of poverty or aiding earthquake victims for example are also value proposition choices (Zott et al., 2011, p. 1030), requiring strategic choices, customer objectives and all other components. Osterwalder (2004, p. 43) identified the business model components as four pillars with nine building blocks as illustrated in table 2 (Annex XII).

An important part of a business model is about: organizational and financial architectures, the customer value proposition, and converting the customer payment into revenue (R) (eventually into profit, depending on the organizational goals). The business logics in the business model describe how profit is earned for the firm (Teece, 2010, p. 173), an identified business process (p) reveals the required resources (r) and distribution (d) aspect. Each of these three aspects are bound to certain costs, the sum of all costs can be used to define a baseline for the selling price, the actual price depends on the customer objectives: a higher price could be in effect for a premium customer service, adding a mock-up (m) to the costs aspect (c)4_{. The described formula for} the model shown in figure 3 is as follows:

𝐑 = (𝒔 − 𝒄) × 𝒎

𝑐 = ∑(𝑝) + ∑(𝑟) + ∑(𝑑)

𝑠 > 𝑐

R Estimated revenue

r Sum of all resource costs (wages, prices, etc.) p Sum of the business process cost

c Total costs (p, r, d) d Sum of the distribution costs

s Estimated sale price m Mock-up price

In the work of Osterwalder (2004) a relationship between the components is also illustrated, as can been seen in figure 8 (Annex XII) the author however does not explicitly mention this relationship in his paper.

Every business model is build-up from business logics: the process part in the business component. Overtime the process needs adjustments as it will eventually no longer meet the expectations and will no longer fit the strategy leading to an inability to fulfill the CVP, continuous change efforts and monitoring are required (Dumas, La Rosa, Mendling, & Reijers, 2013, p. 21) for corporations to adapt to changing markets shaped by advances in technology. Advances in technology enables ubiquitous companies, available 24/7 extending beyond traditional business boundaries and conventional strategy (Huarng, 2013, p. 2104).

3.2 The (missing) link of the business model to strategy

Business models are positioned between the business strategy and the business process according to Bask, Tinnilä, and Rajahonka (2010). They claim that in the business model the vision and strategy are translated into value propositions, customer relations, and value networks (p. 162). According to Versteeg and Bouwman (2006, p. 100) designing a business architecture aids in understanding the relationship between the strategy and the organization of the organization. The business strategy may consist of strategy statements, generic business models and/or applied business models (which are then referred to as business cases) (Versteeg & Bouwman, 2006, p. 93). Often, business models are used for performance management and the formulation of a

4_{Words printed in italic are part of figure 3.}

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hypothetical strategy (Peters, van Kleef, Snijders, & van den Elst, 2013, p. 1).

A business model can be used and thought of as a blueprint, which allows firms to describe and classify the made choices (Demil & Lecocq, 2010, p. 2) which lead to value creation for both the business and the customer(s). Another use for a business model is to steer the organization and to transform it, by means of fiddling, leading to internal consistency and/or adapting to the environment. The blueprint approach is named a static business model by the authors, and the described steering business is dubbed the transformational approach (Demil & Lecocq, 2010, p. 2). Both approaches are to be linked back to strategy, the transformational approach allows management to steer businesses by adjusting a set of related components (Demil & Lecocq, 2010, p. 17) in order to create a new CVP. External influences often force companies to change their business models, new small players on the business market are currently bringing down giant corporations, by harnessing the power of disruptive business models. Kodak’ business model was challenged by the advent of digital photography, a disruptive business model which was threatened the traditional photography business model. Kodak has fought the disruptive model, with little to no success. Disruptive business models are changing the current business environment, managers need to find ways to adopt these models in order to prosper or survive (Dewald & Bowen, 2010, pp. 197-198).

“Business models describe, as a system, how the pieces of a business fit together. But they don’t factor in one critical dimension of performance: competition. Sooner or later – and it is usually sooner – every enterprise runs into competitors. Dealing with that reality is strategy’s job.”

(Magretta, 2002, p. 6).

The link between business models and business strategy is crucial, it is needed to protect competitive advantage over other market players (if any), and is seen as an essential step in the process of designing a sustainable business model. Granularity wise, a business strategy goes more in depth then a business model. Unsurprisingly, every customer segment requires a different CVP (Teece, 2010, p. 180). Competitive advantage is often gained by being different (take Apple for example) and doing better, in such a way that other businesses cannot duplicate that what makes the organization superior (Magretta, 2002, p. 6). If a business has a unique business model which creates a better value proposition than the competitors: it has more potential advantage (Zott & Amit, 2008, p. 4).

Figure 5. Comparison of traditional and modern business (adopted from Al-Debei & Avison, 2010, p. 369). There is a need to work with modular business models, where adjusting components of a business model lead to a new CVP, or increased potential. This need is highlighted by Al-Debei and Avison (2010, p. 369) as they state that current ICT based business models need high adaptability in order to cope with the fast changing business environments, highlighting a visible gap in the digital (often disruptive) business models of today, as can be seen in figure 5. Technology is pushing from all directions, enabling new business models and ways of doing things faster, more efficient, or better: new disruptive business models are on the horizon.

3.3 Influence of new business model trends and disruptive business models

Business models provide the link between new technology and value creation according to Chesbrough and Rosenbloom (2002, p. 532), through innovating business models, companies survive and excel however, innovating business models do not come cheap (Amit & Zott, 2010, p. 3). Gillette spend $ 300 million dollars ($

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of a disposable blade shaving system, optimizing their profit margin on the high quality disposable blades (Ricardo-Campbell, 1997, pp. 2-3). To illustrate business model innovation following other business model trends, Apple is taken as an exemplary case: the iTunes/iPod business model was unique at its time, Apple was the first player to distribute music as an activity linked to the development of iPod hard- and software, pushing legal music downloads to the end-users, eliminating the need for a physical store (Amit & Zott, 2010, p. 4). At the time of introduction, portable music was bought on CD’s and played using a Discman. Similar to the razor and disposal blade model, Apple transformed its business model where the customers (hardware users) had an ongoing relationship with the firm, buying content for the iPod through the Apple store. The results of this radical business model change is visible in figure 6 (Amit & Zott, 2010).

Figure 6. Impact on Apple after changing their business model (adopted from Amit & Zott, 2010, p. 4). The adoption and usage of global digital communication lead to new business opportunities, new business models can be adopted by companies (Bask et al., 2010, p. 160) allowing collaboration over vast distances or as Amit and Zott (2010, p. 6) state in their paper: ”boundary-spanning exchanges and activities”. The possibility to collaborate over a distance, creates the a new form of organizations: virtual organizations, in which there no longer are boundaries of location and time (Afsarmanesh & Camarinha-Matos, 2005, p. 13). According to Camarinha-Matos and Afsarmanesh (2005, pp. 5-6) the emergence of virtual organizations can be seen as a step towards systems integration. In their paper, the authors argue that the emergence of integration is happening at a global level, ubiquitous computing is making this possible, allowing us to work from any place, anywhere and at any time.

Developments in computer networks and related technologies are seen to facilitate the forming of virtual organizations, which can be used to react to changes in the market quickly (Afsarmanesh & Camarinha-Matos, 2005, p. 1). The internet created a key global platform, for the distribution of new products and disruptive services. Today, companies are forced to think differently, as the traditional business models do not offer the flexibility required. A good analogy is to consider the traditional telecommunication companies, fighting the new Voice-over-IP (VoIP) suppliers, whom can deliver their disruptive business far cheaper than the regular telco’s due to rapid ICT developments (Yovanof & Hazapis, 2008) offering far better Customer Value Propositions than the traditional telephone switched network: VoIP for example is not limited to a single location, a customer can use his or her phone anywhere, at any place and at any given time, moreover, making calls between office phones (via the internet) is completely free when using VoIP, even when abroad (e.g. when using a free WiFi connection in a hotel lobby) whereas with a traditional telephone line a call from abroad or home to the office would cost money and would be using an entirely different phone number and subscription.

Today “open-source software, online collaboration, file sharing and peer-to-peer financing” (Hamari, Sjöklint, & Ukkonen, 2013, p. 4) has also been made possible by the advances in ICT. These four terms are instantiations of the sharing economy. Hamari et al. (2013, p. 6) identified 5 trading activities of the sharing economy: renting, lending, swapping, donating and purchasing used goods. In their mapping of these activities, only the first and last activities (renting, purchasing used goods) require a monetary transaction, as the lending, swapping and donating are not limited to monetary transactions. The sharing economy trend (see table 4, Annex XII) is changing consumers into producers, where through technology, services can be offered from consumer-to-consumer. Today is a time of sustainability, green awareness and economic problems. Some consumers are choosing to no longer own their own car for example, rather renting one car if need be from either a business or

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another consumer, who can make extra money to cover expenses such as the car tax or a MOT. It is safe to say that business models are under the influence of ICT innovations, creating new creative ways of doing business, whether it is working together over a distance, or the creation of new CVP’s:

Solving the big issues of our generation requires bold new business models.

(Osterwalder et al., 2011).

Disruptive business models throw dominant players of balance: changing the current game by introducing cleaver new ways of doing business (e.g. the Über App vs regular Taxi’s), thinking outside of the box. Teece (2010) claims that “the internet is causing many ‘brick and mortar’ companies to rethink their distribution strategies – if not their whole business model” (p. 174). The modular approach as proposed in this paper might prove the next step in the modern business models, as not only offline (brick and mortar)

organizations struggle, internet organizations are struggling as well in creating viable business models (Teece, 2010). Moreover, the internet is opening new doors to business opportunities, however, many companies did not think their business model through and therefore failed to exploit the internet commercially (Rappa, 2004, p. 35).

3.4 The objectives of business models

It becomes clear in the scientific body of knowledge that business models can have a multitude of objectives. Most of the business models are focused on either selling their own product or own service for financial gain, but there is more to business models than that. This section aims to introduce business objectives and customer objectives found in business models.

3.4.1 Business objectives

According to Yunus, Moingeon, and Lehmann-Ortega (2010, p. 310), there are two types of businesses in a capitalistic systems: 1. profit-maximizing business and 2. non-profit businesses. They describe social businesses, the financial component of their business models are different, as it is not their intention to make profit, rather to serve society. To be able to service society, a business model with social objectives still needs to provide value for its ‘customers’ by means of selling goods or services at a low price or greater accessibility for example (Yunus et al., 2010, pp. 310-312). Business models can facilitate development partnerships, if

co-development is the objective, a partnership to co-create a product can lead to increased profitability or greater innovative capacity for example, but also has the potential to backfire, as was the case with IBM partnering with the start-up company Microsoft. Often co-development business models are used to increase innovative

capabilities (Chesbrough & Schwartz, 2007). The objective of every business is to make money, whether the business goals are socially oriented, for a non-profit institution or a profit maximizing institution, all business depend on a form of compensation.

“At its most basic level, a company exists to deliver value in return for compensation.”

(Johnson, 2010, p. 7).

Establishing the need to generate a compensation for generated value, the importance of the customer relationship must not be forgotten. The internet plays a role today in customer relationship management, and can aid business by offering real-time information to the customers (Dubosson‐Torbay, Osterwalder, & Pigneur, 2002, p. 8). Customer objectives are the major part of business models, without customer objectives, a business model cannot generate value.

3.4.2 Customer objectives

A business model has a CVP, which is an offering to its targeted customer group, to either solve a problem or fulfill a customer need, at given price (Johnson, 2010). Netflix for example disruptively innovated the rental market of video, by offering customers the advantage of digitally available movies, at a monthly fee. Their customer objective in their revenue plan was to get people to subscribe to a monthly plan, as opposed to hiring a single product in a product-based rental structure (Giesen, Berman, Bell, & Blitz, 2007, p. 28).

“the customer rarely buys what the business thinks it sells him. One reason for this is, of course, that nobody pays for a ‘product.’ What is paid for is satisfaction. But nobody can make or supply satisfaction as such-at best, only the means to attaining them can be sold and delivered.”

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Customers are willing to pay a premium for a product which essentially does the same, take the luxury car for example, but offers a prestige satisfaction which a regular car cannot offer (Drucker, 1999, p. 95). To create a CVP where customers get a prestige transport vehicle, a customer objective could be to provide luxurious cars to the customers. Proving that customers are willing to pay a premium, the Starbucks concern offers custom tailored coffee and tea at a premium price, relying on high-level marketing and branding through word-of-mouth. The reason customers are willing to pay the premium price is simple: the organization takes attention to detail and customer experience, it is all about the experience (Lingley, 2009), the customers buy more than “just a cup of coffee” at Starbucks, their employees are trained to make them feel as special guests. Moreover, the company experiments with adding lifestyle features to the organizations, such as free wireless internet (Plog, 2005). The story of Starbucks illustrates the importance of having customer objectives in the business model, they are necessary for the realization of the CVP, and as described in chapter 3 paragraph 2, are an intrinsic part of the company strategy, required to get the job done.

3.5 From business model to profit

In the academic literature, interesting (new) business models can be found. In the process of this research, several business models were discovered and recorded in table 3 (Annex XII). In practice often more than one business model is used. For example Spotify uses a freemium business model in combination with a premium business model to generate revenue.

3.6 Business model economies and other influencing trends

The new business models found in the academic literature also show signs of new emerging economies, innovations in technology has enabled mankind to do so much more than we imagined, the 21st_{century has} changed the world in unimaginable ways. Table 4 (Annex XII) records found new economies made possible by advances in technology. The described business model economies are linked to business models, the internet economy for example is an enabler for digital services such as Spotify, where music can be streamed either for free, with commercials and at a lower quality, (freemium) or by buying a premium subscription, which has no commercials and high definition sound.

Not only are there new economy forms today, there is also a future promise named Corporate Social Responsibility, which is based on sustainability and responsibility, where sustainability refers to the use of (raw) materials and responsibility refers to the social and environment next to the economical responsibility (Jonker & de Witte, 2006). Non-governmental social enterprise organizations are already funding and supplying social initiatives today. Social enterprises are not limited to non-profit organizations as today also profit-oriented businesses are involved in socially beneficial activities as some have a social conscience or a corporate social responsibility (Kerlin, 2006, pp. 1-2). Looking at Taxi’s, fossil fuel powered cars in particular, they pollute cities and disrupt the air quality in cities, it is claimed that there is a 20% higher chance that the inhabitants of

Amsterdam suffer from lung deceases and live a year shorter on average due to the air pollution caused by the taxi’s in the city. Entrepreneurs saw potential to contribute socially beneficial to the problem and realized an alternative solution to polluting taxi’s to solve the problem, by means of exploiting full electric taxi’s, charged by sustainable energy (van Kuik, Arnoldus, Hillen, & Verloop, 2013).

Sustainability is impacting our corporations today, some are focusing on their environmental impact, others on economic or societal implications. Government legislations, consumers, employees, partners and other stakeholders are pressuring organizations today to become more sustainable. Sustainability has the potential to change all components of the business model: from the business process to sales to the short- and long term value creation capabilities of an organization. The biggest benefit of becoming more sustainable is the improved company or brand image (Berns et al., 2009). Next to an improved reputation, there are also financial incentives.

”Becoming environment-friendly lowers costs because companies end up reducing the inputs they use. In addition, the process generates additional revenues from better products or enables companies to create new business.”

(Nidumolu, Prahalad, & Rangaswami, 2009, p. 58).

Some organizations found out that they could lower their costs and create additional revenue flows by looking at their current business model differently, waste management is taken as an example: about $9 billion worth of reusable raw materials could be found in the garbage. A new partnership was forged with Sony by the waste management to collect electronic waste which used to end up in landfills for example. Another example is found

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in the energy market, smart power grids as a concept was invented years ago, but is now becoming a reality: lowering costs and making more efficient use of energy by using modern technology (sensors, meters, digital technology, etc.) to regulate the power generation, distribution and usage which all leads to lower costs

(Nidumolu et al., 2009). The lowering of costs and increasing revenue flows by looking at the business model in a different way comes from a growing societal pressure to take ecological quality and the well-being of people into account according to Cramer, Van Der Heijden, and Jonker (2006, p. 380).

4.0 Analysis

4.1 A theory on business model components

The contextual model in figure 3 described three main components of the business model, each component has several sub-components as was explained in the theoretical part of this thesis. All components come together in figure 9 (Annex VIII (full size) & Annex XII) which is based on a mind map (Annex I) composed after the theoretical research, and was influenced by the business model ontology (figure 8, Annex XII), business models (figure 1), and the theory found in the analysis part, which has come together into a conceptual modular business model. The three components (business component, customer component and the financial components)

combined are the modular business model, and all components are related to each other. Changing a module of a component, can lead to a new CVP, for example: in changing the “means of distribution” from sending a CD via the mail, through sending the music via a digital platform, saves the customers time, as delivery is now instant and space in real life, as digital content does not take extra space in our real world (uniqueness / superiority of the CVP changes). The open diamond arrows indicate that the combined components together are the business model, their influence is on each other is symbolically indicated by the open arrows, but not limited to those arrows alone. To confirm that the corporate world has a need for a modular business model, interviews were conducted.

4.2 Testing the findings in the field

Qualitative interviews are performed in the field, using the described methodologies of the introduction chapter: AI and semi-structured interviews. The interviews were structured to provide answers to research question RQS#6 and RQS#8, moreover the following propositions are to be judged in practice:

 P1 In the current internet era: business models are about co-creation.

 P2 The identified modular business model components are acknowledged in practice.  P3 Firms are using no more than the discovered business model components in practice.  P4 The thought experiment of modularity in business models is accepted in practice.  P5 Organizations need modular business models

The defined proposition came forth after concluding the theoretical research done in chapter 3. To ensure answering the defined proposition and research questions, an interview protocol is used (Annex XI). The interview protocol has been worked out into a transcript (Annex II) which has been followed partially, deviated when necessary, as it was meant as an opening technique, to establish a feeling of trust and to get the

interviewees to talk more openly. Annex IV includes a short reflection on the used technique and how it worked out in practice. Using the conceptual modular business model (figure 9, Annex XII) the interviewees had something to look at when talking about abstract modular components and the introduction of modularity in the business model. Each interviewee was asked to sign a consent document (Annex X), the document provides privacy options and data usage rules.

4.3 Interview findings

Eleven organizations were found willing to participate in an interview, a lot of time and effort has gone into the preparation of the interviews, the searching of companies and the actual interviews themselves. In Annex VII the fully worked out interviews can be found, along with the final encoding of the data. As some interviewees have requested confidentiality, their respective interviews have been censored5_{in Annex IV. The first part of the} interview protocol has been done off the record, after that the interview started and was recorded digitally. All

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results can be traced back to the respective appendices. All proposition and remaining research question RQS#4 till RQS#9 are concluded in the next sub paragraphs. Due to space constraints, not every argument is quoted from every interview in every proposition, and the quotes have been made as short as possible, without reducing the quality.

4.3.1 Findings for required propositions and research questions

Proposition 1 In the current internet era: business models are about co-creation

Working together with external business partners to co-create value is done in most organizations, there was only one organization which stated that partnerships and co-creation of value should be avoided. As the organization has had bad experiences with co-creation it therefore decided to build their business model in such a way that it houses all business model components internally, no external partners are used to create value. Dropping partnerships did affect the CVP as the organization has limited its offered services.

“We have learned that we need to stay close and true to ourselves, co-creation can go wrong: if you

become dependent on a partner and it does not go right, the customer will judge you. We never use partnerships when there is no back-up plan for our customers.”

[Interviewee #1].

Today there are companies built entirely on the concept of co-creation to create a unique – otherwise impossible to deliver – CVP. Without forged partnerships, the company has no added value to deliver and cannot continue to exist. Other companies are using co-creation to deliver extra added value or to increase their service portfolio allowing the delivery of a stronger CVP.

“The exploitation of the business model is based on collaboration with partners, which are also our

customers.”

[Interviewee #8].

“Many organizations want to do everything, but 1) the organization is not big enough, and 2) the

manager does not believe that you can do everything well. [..] you need to work with partners who empower you and match you technically.”

[Interviewee #10].

Another reason for working together with partners to co-create value is a shortage of equipment or not being able to get a return on investment on expensive equipment that must be purchased, as it is required to do the job. In practice smaller organizations want to offer more services but are not able to deliver the service themselves due to a lack of expertise and equipment.

“Certain partners support the business model of the organization, partners [..] offer extra services

such as archive destruction, which requires extra investments in certification and cars, as it is a niche market partners are used for that [..] It is sold as a product to the customer, but not done by the organization itself.”

[Interviewee #9].

Not always are organizations investing in knowledge, as it is expensive to have all knowledge in-house at all times, some companies choose to use external partners to support their operations. Moreover, the philosophy is that you can no longer do everything yourself: you need to collaborate.

“Technical partners assisting in the daily operations, not all know-how is in house, partners are

required to buy, get support or aftersales. [..] You need partners, as you cannot do everything yourself.”

[Interviewee #11].

There are those which can survive on their own, without any partnerships, but still use them to co-create value as they are closer to the market and can signal which services are required. Moreover, the partners help them to change their CVP or to add a new CVP.

“sells products directly and via 3rd parties. [..] The third parties signal the account managers that

there is a need for a certain product or products, to which the organization responds. [..]The organization is becoming increasingly depend on co-creation, but is also growing on its own. ”

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When asked if partnerships would still work without the usage of modern technology as for example: the internet, the interviewees argued that it would be next to impossible.

“Without technology they cannot sustain their business type, he reckons within marketing everything

is changing towards online.”

[Interviewee #3].

In sum the following conclusions can be drawn about co-creation and its impact on the business model:  Without co-creation, execution of the business model requires all expertise and products in-house;  Most organizations are depending on a form of co-creation of sorts, requiring external partners which

become a part of their business model;

 Co-creation has the ability to change the CVP in the business model;  Technology is facilitating the ability to co-create value.

Co-creation is influencing the business model of organizations today, in the internet era business models are all about co-creation, whether co-creation is a part of it or not. Therefore proposition 1 is accepted.

Proposition 2 The identified modular business model components are acknowledged in practice

In practice, most organizations are already implicitly using business model components, some more than others. Some interviewees started to talk about the components on their own, others talked about the components when asked about them. Talking about the thought experiment and presenting the model, it was attempted to get the interviewees to think about the experiment, some interviewees spotted chances by looking at modularity of business models in general.

“the modular business model is introduced and the interviewee continuously acknowledges

components and parts of the model as they are discussed.”

[Interviewee #8].

“telling about the swapping of a component, and replacing the distribution from snail mail to web

based distribution of informative letters delivering more added value for the customer, the interviewee says that is where the possible chances are: you need to save time.”

[Interviewee #6].

Others already recognized the components from others models, in one interview the interviewee talked about using the components from the business model canvas (figure 2) on a yearly basis, some of which also included in the thought experiment conceptual model, the definitions are naturally overlapping. Not only are the

components recognized in practice, interviewees also start talking on their usage during some interviewees, indicating that they clearly see the link between the modular business model components and can link it to an overall vision of a business model.

“the interviewee says that when they start-up a new office everyone knows who the competitors are,

a market research is done prior to the start, which tells something about the feasibility, and then everything is fine-tuned with the according staff.”

[Interviewee #7].

“talks about the business model canvas, which is used in their annual plan to think about where are

we and where do we want to go, to that extend the model is recognized. Channels, partners, etc. are used.”

[Interviewee #10].

It is clear that the modular business model components are recognized in practice, as other organizations are already applying them (implicitly) on a daily basis.

“partners and changing business process offers a new CVP, interviewee calls the modules by name

and tells how some of the components are used in the organization. [..] argued that the organization is already using the defined components conform the principles of modular business models.”

[Interviewee #9].

“the identified components are recognized from daily operations, distribution channels however are

TOWARDS A VISION OF BUSINESS MODEL COMPONENTS

MASTER THESIS NICK HOOIJENGA