Business Models Evolved
Business Models Evolved
Business Models Evolved
Business Models Evolved
How 7 innovative business models
emerged – a Case Study Analysis
Business Models Evolved: How 7 innovative business models
emerged – a Case Study Analysis
MSc.BA Thesis Strategy & Innovation
Date:
22
ndAugust 2010
Author: Tom Bakker – s1423312
Supervisors:
Preface
There was not a cloud in the sky when this Master Thesis research (MSc.BA Strategy and Innovation, University of Groningen) started in 2006. Economic conditions were stimulating, businesses expanding and investor and consumer confidence high. Companies had learned their lesson from the burst of the Internet Bubble in 2000 and the subsequent economic downturn. There was a new focus on corporate governance, sustainable practices and, very important, profitable business models. Because if there was one lesson to be learned from the so-called ‘Dot-com bubble’ is that just relying on a new technology was not sufficient for a sustainable business model. Other aspects such as offering the right products & services, having a feasible revenue model and an effective marketing strategy proved to equally important. The mistakes from the Dot-com age at the end of the 1990s would not happen again, or so was claimed.
It is now the year 2010 and the world just witnessed one of the most severe economic crisis in history. In just two years time, the global business landscape has been reshaped and trusted business models became obsolete within a matter of weeks. Famous corporate names, like General Motors, Chrysler, AIG and Barclays, had to restructure dramatically or had to be bailed-out by the government. What happened? How could things go wrong so quickly? It turned out that, while forces such as emerging economies, new technologies and changing financial conditions were transforming the business environment, business models essentially remained the same.
Robert Bood, partner at FairSights and expert in scenario thinking & strategic innovation, was early in realizing the power of business models and the forces that can change the business landscape completely – creating new opportunities for innovative business models. This thesis explores the concept of business models and the forces that create innovative business models. As such, it provides insights about what the critical elements of successful innovative business models are, what drives them and how they evolved. Insights that are highly relevant in the reshaped economy of today and in the future.
I would like to take the opportunity in this preface to thank a number of people that were essential in the completion of this thesis. First, I would like to thank Robert Bood, for providing me the opportunity to study the amazing phenomenon of business models and giving me valuable advice from his practical experience in dealing with international corporations. To be fair, it took me a long time to fully comprehend the concept. Analyzing and applying the concept needed practice and gaining experience in the actual business world. For me personally however, it was worth the journey.
Furthermore, I would also like to thank fellow students, colleagues and friends with whom I had many stimulating discussions about the topic that shaped my ideas and, consequently, the research report. There are too many people to mention, but special regards go out to Leo, Jeroen, Marie-Eve, Jan, Truusje and Marco. In particular, the wisdom of life from ‘Buddha Marco’ provided me with new motivation and ambition to pursue my goals. Hoping to meet you all in Groningen soon again!
The road of completing this thesis was sometimes unpredictable and difficult. The unconditional support and faith from my family cannot be put into words. Henk, Francis and Bob: thank you for everything you have done to accomplish my ambition of achieving the unthinkable and finishing my long educational career. This is just the start.
Finally, this thesis is dedicated to the love of my life, my Xiaofei. It was during the course of this research that you came into my life, like a miracle. You gave new meaning to my life and together we will fulfill our dreams and ambitions. Wo ai ni, lao po.
Summary
Business models became a fashionable concept at the end of the 1990’s, during the dot-com hype. The rise of internet created many new opportunities for entrepreneurs to start innovative businesses – new ‘models of business’. Although the definition of ‘business model’ has been discussed and further developed, its meaning essentially remained the same: how firms create sustainable and profitable revenues. Now, almost ten years later, business models are increasingly used by companies to describe their unique competitive advantage and/or to compare themselves with competitors.
Little research has been done so far on how business models come into being. This is relevant information for companies, as competitive advantages are becoming less sustainable – new opportunities have to be constantly identified/developed. Therefore, this research has the objective to investigate which drivers lead to radical and successful business models. In other words, which sources of inspiration of the entrepreneur/manager led to the development of the business model? Next to this, the second goal of this research is to describe the process in which the business model came into being.
An exploratory case study method was applied to investigate this subject, investigating the following seven cases: Achmea Health, B/N PanelWizard, Fortis Venturing, Hotels.nl, ING Direct, Marlies Dekkers and Ophtec. For each case, two data collection methods were used: interviews with entrepreneurs/managers and the collection of secondary data.
Analysis of the cases resulted in the following outcomes:
1. The seven cases studied in this research are successful, not only because they contain a single or several innovative building blocks, but more importantly: the relationships between these building blocks are logical and cohesive.
2. Successful business models were able to identify opportunities in the changing business environment, by switching between an outside-in and an inside-out strategic perspective.
3. Most of the drivers for innovative business models were identified in the direct surrounding of the company: the value system, consisting of suppliers, buyers, consumers, competitors, consultants, knowledge institutions, etc.. Within the value system, most of the chances came from buyers (e.g. businesses) or consumers.
4. Several business models created new demand for its offering by themselves, such as Marlies Dekkers and Fortis Venturing – thereby obtaining a unique competitive advantage, as nothing comparable is on the market.
5. In order to identify drivers for innovative business models, a two-stage approach is recommended. First, map the value system of a particular business model so that it is clear which and how value is traditionally created. Second, develop a strategy of how to capture value from these opportunities: responding to developments in the general environment or taking initiative individually.
6. Four phases could be differentiated in the innovation process of a business model: the conception, development, gatekeeper and implementation phase.
7. In all cases, the entrepreneurs involved achieved significant success of convincing gatekeepers to implement the business model.
Index PREFACE 2 SUMMARY 4 1. INTRODUCTION 7 2. BUSINESS MODEL 10 2.1Definition 10
2.2Evolution of business model concept 12
2.3Taxonomies 13
2.4Building blocks 15
2.5Place in firm 16
2.6Function 17
2.7Business model evolution 18
2.7.1 External drivers 18
2.7.2 Internal drivers 21
3. METHODOLOGY 22
3.1Research Strategy 22
3.2Case Study Design 23
3.3Data Collection Methods 25
4. FINDINGS 28 4.1Achmea Health 28 4.2B/N PanelWizard 29 4.3Fortis Venturing 31 4.4Hotels.nl 33 4.5ING Direct 34 4.6Marlies Dekkers 36 4.7Ophtec 38 5. ANALYSIS 41
5.1Single case analysis 41
5.1.1 Achmea Health 41 5.1.2 B/N PanelWizard 43 5.1.3 Fortis Venturing 44 5.1.4 Hotels.nl 46 5.1.5 ING Direct 47 5.1.6 Marlies Dekkers 49 5.1.7 Ophtec 50 5.2Cross-case analysis 52 5.2.1 Building blocks 52
5.2.2 Drivers general environment 53
5.2.3 Drivers value system 54
5.2.4 Internal drivers 55
6. CONCLUSION 57
6.1Implications for management 57
6.2Implications for research 58
REFERENCES 60
SUPPLEMENTS: 63
1. Introduction
The last couple of years has seen a burst of innovative business models. Several factors contributed to this phenomenon, such as changed consumer preferences and the rise of Information Technology. Especially the ever-improving Information Technology has given organizations new possibilities to create value for their customers. Considering this development, it is surprising that business models have not received much attention in both business and academic literature. As a result, there is a lack of contemporary knowledge of where a modern business model consists of, and how it comes into being.
In general, a business model has to provide an answer to the following question: what does the company do for its living and how is this realized? The first part of the question relates to the financial aspect of the business model. Every company has to consider how it can create a profitable and sustainable stream of revenue. In order to achieve this, a company produces (a portfolio of) products, performs services and/or stages experiences. Naturally also the issue of who the company wants to serve (business to consumers, business-to-business, niche, etc.) has to be included in the business model. The second part of the question that the business model has to answer, is related to the organizational side: how do we create and capture value? Most companies have a certain competency at which they have a competitive advantage. That could be through a number of recourses, skills or knowledge. These competences have to relate to what value is created (the first part of the question), otherwise the company does not benefit from its core competitive advantage and competitors might profit. The entire organization has to be constructed around the business model, in order to execute it effectively. Next to this, the management of a firm not only has to consider its own organization, but also the partners that are involved in performing the business model. On the basis of this first description the business model concept is explored in greater depth in the rest of this thesis.
The research objective and research question are formulated as follows:
Research Objective
‘To understand the drivers of radical and successful new business models.’
Research Question
‘What constitutes a business model and which factors contribute to a successful innovative business model?’
Related questions
1. How can a business model be described?
2. Is it possible to distinguish types of business models?
3. Which building blocks can be identified of a business model? 4. What are the functions of a business model?
5. Which drivers lead to creation/adaptation of a business model?
Next, it is possible to look at the drivers of a business model: what factors lead to the construction of a business model? In theory, two perspectives are relevant to identify drivers: the outside-in and inside-out approach. The first approach focuses on developments outside the firm that lead to new business models, such as new technologies, consumer preferences, government legislation, economic circumstances, etc. In this section of the paper theories are discussed that describe the nature and dynamics of the environment with the firm. Examples are: complexity theory, co-evolution, and network effects. This perspective however is not enough if we want to explain how the final business model came into being. Indeed, drivers can also come from inside the firm (e.g. invention in laboratory). Besides this, a number of internal factors influence the type and interpretation of information a company receives from the environment. Perhaps a certain path-dependency exists here: depending on the network you are in and the mental model of the information-receiver, relevant information is separated from non-relevant information. Added to this, the execution depends on the resources of the firm. Thus, to explain the existence of a business model, we do not only have to look for developments in the surrounding of a firm, but also factors inside the company. Possible theories for the inside-out view are: learning, resource/knowledge based view and social construction.
To illustrate the theoretical framework, a conceptual model is created and pictured below. This general models illustrates on the left-hand side the influences coming from the environment on the development of a business model. On the right-hand side we have the factors of the inside-out perspective influencing the final business model. Learning takes place between the environment and the firm and vice versa. In the end, this results in a new business model, as can be seen in figure 1.
Figure 1: The drivers of a business model
Research Design
Disposition of Thesis
2. Business models 2.1 Definition
A recent study by IBM Global Business Services found that business model innovation outperforms other types of innovation, such as product and process innovation (IBM Global CEO Study 2006). Companies looking beyond products and services and partnering with players outside the industry, obtained high financial returns in comparison with companies focussing only on incremental product improvement or operational innovation. It is therefore not surprising that the business model is a popular concept among companies and researchers. However, the concept is not uncontroversial, as Porter notes: “the definition of a business model is murky at best. Most often, it seems to refer to a loose conception of how a company does business and generates revenue. Yet simply having a business model is an exceedingly low bar to set for building a company. Generating revenue is a far cry from creating economic value, and no business model can be evaluated independently of industry structure. The business model approach to management becomes an invitation for faulty thinking and self-delusion” (Porter, 2001, p.13). Scanning the current literature on business models, Porter is not alone in his criticism: “Business models are perhaps the most discussed and least understood terms and aspects in the areas of eBusiness, eCommerce and eMarkets” (Alt and Zimmermann, 2001); “…while it has become quite fashionable to discuss business models, there is still much confusion about what business models are and how they can be used” (Shafer et al., 2005); “Business models are still relatively poorly understood…” (Osterwalder et al., 2005).
As the quotations indicate, the business model is a popular concept in both academic research and among practitioners such as managers and consultants, although not well understood. Considering the many different explanations in literature, a consensus has not yet been reached on the meaning of the business model concept. In order to gain more insight about the theoretical contributions to the business model concept, an extensive literature study was performed. The largest contributions to the field are included in table 2.1 below.
Besides building blocks, researchers started to differentiate between several types of business models by constructing a taxonomy (e.g. Bienstock et al., 2002; Karin, 2004; O’Daniel, 2001; Petrovic, 2001). Finally, the current business model literature (from 2006 onwards) is starting to investigate design and adaptation issues of business models.
Author Definition Elements Taxonomy Design/Drivers Other
Alt et al. (2001) X X Chesbrough et al. (2002) X X X Colvin (2001) X Feng et al. (2001) X X Hamel (2002) X X Jacobs (2007) X X Karin (2004) X Linder et al. (2000) X X X X Magretta (2002) X X X Mahadevan (2000) X X Markides (1999) X X Morris et al. (2005) X X X O’Daniel (2001) X X Osterwalder et al. (2005) X X X X X Petrovic et al. (2001) X X X X Rajala et al. (2003) X X Rappa (2007) X X Schweizer (2005) X Seddon et al. (2004) X X Shafer et al. (2005) X X X Tapscott et al. (2000) X Tikkanen et al. (2005) X X X Timmers (1998) X X Weill et al. (2001) X
Table 2.1: Contributions to Business Model Theory
The second point that becomes obvious from table 2.1 is that almost all of the authors propose a definition of their own of the business model concept. Authors often state in the introduction that the reason to formulate a definition is because of the confusion surrounding the concept and lack of consensus among academics. Osterwalder et al. (2005) contributes this confusion of the business model concept to a difference in perspective, about which it is possible to look at business models. They differentiate three categories of definitions of business models:
1. Business model concept: in this category of literature, authors conceptualize what a
business model is and what aspects it consists of. This is the more overarching perspective of business models. An example of a definition in this category is “a representation of a firm’s underlying core logic and strategic choices for creating and capturing value within a value network” (Shafer et al., 2005). Section 2.2 discusses the concept in more detail.
2. Taxonomies: other researchers make a classification of business models in their
3. Instance level: finally, it is possible to distinguish a category of ‘business model
literature’ where the author describes real world business models, such as the ‘Dell-model’ or the ‘Xerox-‘Dell-model’.
Although all three perspectives of business models are used in literature, the distinction between the three categories is clear: they move from a high abstraction level (concept) to a more concrete level (instance level). In this sense, one can not say that a certain perspective of business models is ‘right’ or ‘wrong’, but they highlight three different viewpoints on the concept. The problem is that the three perspectives are used randomly in literature, both academic and popular, which leads to confusion and frustrates progress of business model research.
Innovative business models
In the research question it is stated that this research is concerned with the study of highly innovative business models. What do we mean with highly innovative? Markides (2006) provides a useful framework for what should be called an innovative business model. According to him a business model is innovative when it enlarges the total market: either by attracting new consumers or convince existing consumers to buy more. This is an important distinction from a ‘normal’ strategic change, like changing the organization or producing new products. Those measures do not necessarily attract new consumers. The stock broking website Alex on the other hand, did enlarge the group of people that invested in shares and bonds. Likewise, DSB Bank made it possible that a often neglected (lower-income) group of consumers did have access to financial services. Finally, a business model is according to Markides highly innovative when it fundamentally changes the current market (e.g. Ikea, McDonalds, Amazon, etc.).
2.2 Evolution of business model concept
In this section, the current literature on business models is reviewed in order to obtain a comprehensive and modern definition of the business model concept. The first literature on business models was primarily focussed on e-business: creating profitable revenue streams with internet based activities. O’Daniel (2001) and Tapscott et al. (2000) provide two examples:
- “the term ‘business model’, especially in the Internet era, is used to describe the combination of product, service, and information flows along with a scheme for revenue generation” (O’Daniel, 2001, p. 38).
- “inventing new value propositions, transforming the rules of competition, and mobilizing people and resources to unprecedented levels of performance….a distinct system of suppliers, distributors, commerce service providers, and customers that use the Internet for their primary business communications and transactions” (Tapscott et al., 2000).
Seddon et al. (2004) argue that this is not surprising, as especially in the beginning people with an ICT background applied the business model concept, while management-minded scholars used the closely related strategy concept (more about this in paragraph 2.3). Over time, the concept was generalized to include other types of business. Most of the more contemporary definitions stress the ultimate goal of a business model: of how a company wishes to generate revenue, as the following examples illustrate:
- “a business model tries to give an integrated and consistent picture of a company and the way it aims to generate revenues” (Schweizer, 2005, p. 40).
- “how the firm generates revenues or manages costs” (Weill et al., 2001, p. 3).
This focus on the financial aspect is an important element of the business model concept according to Feng at al. (2001), as it provides the link between innovations and cost-recovery. During the days of the dot-com-hype this element often lacked in the business model, or was poorly described. The result was a high burn-rate of companies with innovative ideas, but not about how they want to make money (Colvin, 2001).
Recent definitions of the business model concept expand further, explaining not only how a profitable revenue is generated, but also incorporate the customer and how value is created and appropriated:
- “a business model is the combination of who, what, when, where, why, how, and how much an organization uses to provide its goods and services and develop resources to continue its efforts” (Mitchell et al., 2004, p. 41).
- “…value creation processes and capturing the opportunities in the market into revenue though sets of activities, processes and transactions” (Rajala et al., 2003, p. 12).
Just like Porter, Magretta (2002) warns that the ever-expanding meaning of the business model concept will result in becoming similar to the strategy concept and in the end becoming meaningless. From the examples above, it is already observable that business models have dramatically expanded, but nevertheless are crucial to gain a competitive advantage.
All of the definitions include the role of the consumer and what value is created. Besides this, the definitions stress that a business model should describe how the value is created for the customer. Because of the similarity between the several definitions, this thesis takes the most complete definition of the business model concept as a starting point, that of Osterwalder et al. (2005). Osterwalder et al. (2005) define the business model concept as: “a business model is a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams”.
From this definition it becomes clear that a business model is not only limited to the company, but also includes stakeholders (e.g. partners, shareholders) and customers in it. Also, it is not limited to the production or delivery of a product/service – it includes all. To say in short, a business model is about what value a company creates, and how it is created. As Shafer et al (2005) clearly illustrate, it is very important to pay attention on all the different aspects of the business model. The consequences of leaving out one aspect can be dramatic for a company, as it is not clear what the influence of the business model will be on the overall organization.
2.3 Taxonomies
possess more or less the same level of technology – the question is what you do with it. Take for example Apple I-tunes: this combines a service on the internet with a music player. It is therefore hard to determine exactly which industry Apple is in with this concept (music, software, internet, technology?). That is why some authors (e.g. Alt et al., 2001; Osterwalder et al., 2005) propose to use the business model as a unit of economic analysis, as it transcends the traditional definitions of industries. Several researchers proposed general types of business models, in order to make comparison possible. This section discusses some of the most mentioned taxonomies.
The most basic taxonomy on business models is provided by Alt et al. (2001), who claim that there are two types of business models: business-to-consumer and business-to-business. According to them a company offers products or services to either a consumer or a business, or both. Recently, Rappa (2007) added the consumer-to-consumer model to this list. Modern web-environments make trade between consumers possible, such as eBay. In most definitions however, who the customers are is only part of the business model concept. Rappa (2007) therefore distinguishes nine broader categories of business models. They are summarized below:
- Brokerage model: a broker is an intermediate party that brings buyers and sellers
together. In return, it charges a fee or commission for every transaction it enables. Examples are auction brokers like eBay or Marktplaats, and transaction brokers like PayPal or Checkout.
- Advertising model: a broadcaster that mixes content (website) or services (email) with
commercial messages (e.g. banners, ads, etc.). Is most suitable when the site draws many visitors, or is specialized. Business models that fall in this category are e.g.: portals (Yahoo, MSN), user-registration (NRC-Handelsblad, De Pers) and content-targeted advertising (Google).
- Infomediary model: information about consumer characteristics and habits are
valuable information for most companies. Some players are specialized in the collection and analysis of consumer data (e.g. AC Nielsen). Also consumers have a need for an independent source of information on the quality of products/services. They find this kind of information on websites like Independer.nl or Kieskeurig.nl. - Merchant model: web-based retailers of products and/or services. Here, a distinction
has to be made between ordering physical products online (e.g. Amazon, Bol – called a Virtual Merchant) and ordering digital products (e.g. I-tunes – called a Bit Vendor). - Manufacturer (direct) model: manufacturers that use the internet to reach their
customers directly. Most popular example is Dell, that enables customers to compose and order computers online.
- Affiliate model: this business model is not generating revenues through one site, but
though a (large) number of affiliated sites. Most of the times these affiliated sites are paid when a visitor clicks on the ad or banner (pay-per-click). The advantage for the merchant is that when an affiliate does not generate substantial traffic on its website, it represents no costs. Amazon also applies the affiliate model, next to the merchant model described above.
- Community model: one of the most recent and promising business models on the web
- Subscription model: the company charges the consumer a periodic fee for the service
that is provided. An example is IMDB.com and Skype. Is often combined with the advertising model.
- Utility model: in comparison with the subscription model, the consumers pays for the
actual usage of the service. Example is Planetvoetbal.nl.
The taxonomy of Rappa is largely focussed on web-based business models. Therefore, it may not apply for every business. Linder et al. (2000) instead define eight types of business models in more general terms: price models, convenience models, commodity-plus models, experience models, channel models, intermediary models, trust models, innovation models. Both taxonomies cover the revenue side of the business model concept: they describe how the company creates sustainable financial streams. In theory, every business model in practise should fall within one or a combination of these taxonomies. It is now possible to group companies in one of the categories – useful to study differences in components or drivers of these business models.
2.4 Building blocks
Although the definition of Osterwalder (2005) is applied in the current thesis, a considerable amount of overlap consists among the literature of business models, with respect to the components or building blocks (Hamel, 2002; Osterwalder et al., 2005; Shafer et al., 2005). Broadly speaking, a business model consists of four building blocks, a description of the: product, customers interface, infrastructure management and financial aspects. These are shortly explained below.
Product: as a business model describes how a business earns a living, the products and/or services that the firm offers should be mentioned in the model. Osterwalder et al. call this the ‘value proposition’ of the firm. Not mentioned in the literature of business models is the possibility to stage experiences. Pine and Gillmore (1998) illustrate in their research that staging an experience can create a high amount of value. Also, an increasing amount of companies is interested in this new economic activity. Because of this, the current thesis also recognises an experience as a possibility to incorporate in the business model concept.
Customer interface: most companies do not have the entire world population as a target group, but make a segmentation of the potential group of consumers. Examples of possible segmentation criteria are: age, gender, place, income, education, etc.. The business model describes to which group of consumers the company wants to offer value. Next to this, the model incorporates how it wants to get into contact with the consumer – the distribution channel.
execute a major change in the business model. Finally, in the modern economy all companies are part of a network or value web. Possible partners are not only suppliers, but also: competitors, customers, government, consulting agencies, etc. To construct a business model, it is important to recognise the parties involved in the execution.
Financial aspects: the business model should generate a profitable and sustainable revalue stream, as described in the definition above. In this respect, the description of the business model also includes an explanation of the cost and revenue structure of the model. Shafer et al. (2005) point to the fact that ‘value capturing’ is often overlooked when a company launches an innovative new product. A possible consequence is that the costs of the product exceed the revenue, or that a competitor is able to copy the product (with or without a small adaptation). In both cases the value captured from the business model is less than the value created. Many young e-businesses in the late 1990’s, during the ICT-investment boom, suffered from this lack of sophistication of the business model. On the other side, incumbent companies are sometimes locked in the exploitation side of business: they focus exclusively on return-on-investment or net present value. This focus limits companies to innovate and adapt the business model to a changing environment (March, 1991).
Looking at the different building blocks of a business model, it becomes clear that there could be some overlap with other concepts, such as strategy, business process model or enterprise models. This topic is discussed in the next section, that explains the place of a business model in the firm.
2.5 Place in firm
Business model as a concept came into fashion in the 1990’s, as the Information Technology Revolution greatly expanded the possibilities for companies to create value. During that time, start-ups tried with a business model to convince capital lenders (e.g. banks, venture capitalists, business angels, etc.) to invest in them (Shafer et al., 2005). This is also the reason why the term business model is heavily associated (although not justified) with e-businesses. Nowadays many firms from all sectors use the term business model in their annual reports. However, the concept is still relatively new and some debate continues about the differences with other company descriptions, e.g. strategy and business process models. Osterwalder et al. (2005) argue that a business model is in the centre of all the other major concepts – it is the building plan that follows from the strategy and effects the organization and technology of a firm. Hence, they call this the ‘business triangle’. In its turn, the triangle is subject to external forces from the environment that constantly influence (this topic will be discussed comprehensively in the paragraph 2.5). An illustration of the business triangle is included below:
To clarify the distinction between business models and other concepts, an explanation follows.
Le gal en viron m ent C o m p e ti ti v e fo rc e s Cus tom er Dem and
Figure 2.1 Business Triangle
Business process models: a more clear distinction is possible with the term business process models (BPM). Where a business model is focussed on creating and capturing value (see definition), a business process model is more concerned with how a model is implemented in the processes of a firm. This former activity is called ‘business modelling’, a source of confusion with business models, however referring to BPM and not the business model concept (Osterwalder et al., 2005).
Enterprise models: the main goal of an enterprise model is to improve the efficiency of an organization, through its processes and activities (Doumeingts and Ducq, 2001). In comparison, a business model is more concerned with the outside of the firm, namely creating value for customers and other stakeholders. The enterprise model is therefore located in the business organization box in the Business Triangle.
2.6 Function
As stated before, the business model concept is relatively young in comparison with other concepts known in business literature. It still has to prove its ‘value’ as a method for analysing and improving companies. Therefore, the main functions of executing a business model are (Osterwalder et al., 2005):
- Understanding: by making explicit all the relevant aspects of the business model, a better understanding of the company and how it creates value is developed. Also, when sharing this representation, a common framework is created for more people in the organization. This is important, as other persons could have a different perspective on the business model. When the business model is ‘captured’, it is possible to communicate this within and outside the organization.
- Analysis: once a business model is understood, it can become a unit of analysis to compare it with other (rival) business models or to track it over time.
- Innovation: a business model is targeted towards the future (e.g. value creation, financial rewards, etc.). As such, it is an important source of innovation for a company. Besides this, innovation opportunities occur through the testing and simulation of new business models.
- Patenting: according to Beresford (2001) e-business models increasingly become a source of competitive advantage and are therefore patented. Sometimes other players in the industry can use the underlying technology of a part of the business model. An example is Google that licensed its search technology to Yahoo.
To summarize, the different functions of explicitly describing a business model are not to be underestimated. Especially for analysing and, accordingly, managing the firm business model formulation is very important. Even more so in nowadays fast-moving environment, with many factors for companies to be aware of (Hamel, 2002). Therefore a business model is constantly under pressure and management needs to adapt it to changes in the business landscape. In the next section, the focus is on the drivers that force business model changes.
2.7 Business model evolution
The business model is a broad concept, describing what value is created and how the value is captured. Its building blocks are: product, customer interface, infrastructure management and financial aspects. In practice several types of business models exist that companies apply, according to their needs and situation. Basically, this is where the current knowledge on business models ends. Summarizing, we roughly know what a business model as a specie is and that there are several breeds competing in the business ecosystem. But how did these business models evolve? Where do they come from? Contemporary literature on business models has no answers to these questions, which are the main goals of this research. This is why we have to turn to general knowledge about innovation and its process of existence. Two main perspectives in strategic literature are relevant for this research: the outside-in perspective and the inside-out perspective. In the first case, companies start by looking at the environment and try to identify opportunities (e.g. society, technology, legislation). From the inside-out perspective however, companies first look at their own resources and capabilities in order to choose their strategy. Both perspectives could theoretically explain how business models come into being. The insights gained in this section will be used in the design of the survey, that is exploratory in nature. Section 2.7.1 describes the literature from the outside-in perspective, while in section 2.7.2 the inside-out theory is discussed.
2.7.1 External drivers
and its environment as management is forced to think about the relationships between the building blocks (Leeflang et al., 2000).
Innovation literature learns us however that the road from an idea to a model is sometimes long and often unpredictable. From an outside-in perspective, many forces outside the company decide the outcome of the business model. Constant changes in the business landscape result in unpredictable outcomes of the map management draws (Normann, 2001). The environment should nonetheless not be seen as a threat to business models, but a space that leads to opportunities. New technologies, economic circumstances, legislation, and social/demographic changes. Normann (2001) argues that these rapidly changing circumstances in the surroundings of a company lead to an opportunity space, that management should exploit to create new business models. Internet for example, created many new possibilities for companies to produce, sell and deliver radically innovative products/services. Like the big-bang, a vast-expanding space was created in the 1990’s that is still being explored today by many innovative entrepreneurs. The environment of companies does not only consists of these general forces, but also more visible actors in its value web (Jacobs, 2007). Suppliers, competitors, agencies and clients contribute to the value creating process and therefore have an impact on the business model. Next to this, some actors have considerable power in the process of business model design. They are called gatekeepers, and the innovative business model needs their approval in order to be selected (Lampel et al., 2000; Gemser et al, 2007). In the remaining of this section the following topics are discussed: general discussion about innovation evolution, general environment, value web and it is closed with the first part of the conceptual model.
Business model evolution
1989). For example, when consumers can choose one of several products, this influences the legitimating of the other products. A famous example of this social interaction occurred in the video industry between Betamax and VHS. In the end, only one technology (VHS) survived because the relevant selectors (consumers) contributed the highest value to the VHS-players. This social influence process also occurs in the development phase of products. Research has shown that it can radically alter the end result (Bijker et al., 1989). So, during the development of a business model relevant actors significantly influence the outcome of this process. For example, top management may not approve the business model, or the bank, a government agency, etc… All the player in the value web of the company influence the outcome. These are described in more detail below. We start however with more general drivers in the environment of the firm.
General environment
The general environment is different from the direct environment of the firm, in that it can hardly be influenced directly. Only in some exceptions are companies able to manipulate forces as: demographics, regulation (government), economy, technology or society; the so-called DRETS. This environment however provides companies with an enormous opportunity space (Normann, 2001). New technological, political or social circumstances leave possibilities for ‘something new’, hence business model innovation.
Value-web
Closer to companies, and more likely to influence, is the value system a company is embedded in. Nowadays almost no industry is completely vertically integrated. The fast-changing business landscape forced companies to focus on their competitive advantage and outsource/close other activities. In order to produce a good, deliver a service, stage an experience, many business work together in a value web. The Dell-case shows us that a different value web can create an innovative business model. Off course, the value web itself is also influenced by the general environment.
Gatekeepers
Some actors have a special power in the legitimation process of an innovation. In strategic literature these are called gatekeepers (Lampel et al., 2002). Their approval is needed in order to bring the innovation to the market successfully. Some types of business for example require government approval. For other ideas it is essential to obtain sufficient financial funds. Often, banks play a large role as gatekeeper for business models.In other cases, a company may need co-operation from another company with a certain complementary asset (e.g. intellectual property rights). Consequently, gatekeepers can drastically alter the result of a business model innovation.
Preliminary conceptual model
2.7.2 Internal drivers
Next to the outside-in perspective, a contrasting view is possible: the inside-out perspective. Some entrepreneurs first look at their own resources and capabilities and then observe an opportunity for innovation. This does however not take away the influence created by relevant actors, though social interaction described before. The process from business idea to business model is the same. Yet the starting point is different: instead of looking at the environment for opportunity space, one looks at his own resources and capabilities for inspiration. In sectors more cultural sectors like fashion, innovations often come from within. Sometimes the process can be described like a ‘tango’: of following (looking at the environment) and leading (inside-out perspective) the consumer. With the construction of business models, this could be similar to other types of innovations.
The conceptual model of the business model evolution-process shows the inside-out view, on the right hand side of figure 2.3. Here, an entrepreneur obtains a business idea from the own resources and capabilities, and evolves along relevant selectors and gatekeepers into a business model.
3. Methodology
In this chapter the methodology of the research is described and motivated. The first section discusses the research strategy – the general method to achieve the research objectives, as formulated in the Introduction of this paper. After analysing several research strategies, a choice is made in favour of the case study. The design of the case study, including the characteristics and number of cases, is explained in the second section. Finally, the third section goes into more detail about how the data is actually collected. This approach corresponds with the process as described by Saunders et al. (2000) and Yin (2003).
3.1 Research Strategy
From the literature research performed earlier, it is clear what the current body of knowledge on business models is (see chapter 2). At the moment, literature is still mainly focussed on the definition and taxonomy of business models. This research goes one stage further: exploring the drivers behind the existence of business models. Although some researchers have investigated the influences that force adaptation of a business model, no research has been performed on the drivers for completely new business models. Therefore, this research is of an explorative nature: findings in reality will lead to new insights in the coming into being of business models. As such, an inductive research approach is executed, which means that first empirical findings are analysed from which theories can be derived (De Leeuw, 2001). This in contrast to the deductive approach, where theories are tested with empirical data so they can be rejected or confirmed. Now, in the former chapter a number of key constructs on business models and innovation has been explained (e.g. value network, general environment, selectors, resources). According to Eisenhardt (1989) this is allowed in an explorative case study: the goal is not to confirm these constructs, but when they do overlap with theory the findings are more grounded (they are similar to earlier research).
The general approach described above helps in choosing the appropriate research strategy. Yin (2003) distinguishes five types of research strategies: experiment, survey, archival analysis, history and case study. Each of these research strategies has its own characteristics and (dis)advantages. The question about which of these five approaches to choose depends on the following three conditions (Yin, 2003):
- Form of research question: depending on the type of research question, a certain
research strategy may be more effective over the other. Research questions that can be summarized into ‘what’, ‘who’ and ‘where’ questions, may be answered through a survey or an archival analysis. On the other hand, questions that focus more on ‘how’ and ‘why’ are more appropriate for an experimental, history or case study. These latter strategies leave more room for the interpretation that is necessary in explanatory studies.
- Extent of control over behavioural events: some research requires that the researcher
has control over the events that are investigated. This is actually possible in an experimental environment: the researcher controls the settings in a preferable context. Other research strategies do not have this option: you have only the possibility to analyse existing documents, carry out observations, or interview respondents.
- Degree of focus on contemporary events: when the research question focuses on
Following the conditions described above, the most appropriate research strategy is the case study. First, the main research question is focussed on how innovative business models come into being and why they are successful. Other research strategies are not able to produce insights that provide this information.
3.2 Case study design
The case study is an effective research strategy when the research is exploratory of nature and when you want to provide new hypothesis. In this section, the design of the case study method, as constructed for this research, is explained in more detail. Three aspects of the case study design will be discussed below: the unit of analysis, selection criteria and validity.
Unit of analysis
One of the components in the case study design of Yin (2003) is the unit of analysis: the definition of what the case is. In social sciences possible cases are individuals, groups of people, organizations or networks. This research is focussed on business models, so business models form the unit of analysis in our investigation. In chapter 2 the business model has been defined as: “…a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams”.
However, in order to determine the drivers of business models, one case study may not be sufficient. From chapter 2 it is visible that there are many possible drivers for business models and ways in which they come into existence. In reality, not all the possible drivers may be present in the construction of a business model. That is why a multiple case study design is applied. Eisenhardt (1989) states that the typical case study design contains between 4 and 10 cases. Below these number of cases, the information that is gathered is insufficient: not all of the drivers may be identified. After 10 cases, the value of the added information will decrease and redundancies in the data appear. The approach also allows for cross-case analysis (Eisenhardt, 1989), as comparisons are possible between pairs of cases. In order to maximize diversity between cases, four industries are selected for case study research: Finance, Health, Creative Industries and Web.
Selection criteria
As a consequence of the multiple case study design, selection criteria have to be formulated. Two selection criteria relevant for this research are stated in the main research question and are: innovativeness and success. They are described in more detail below.
Innovativeness
Consequently, only cases that enlarge the current market or change it altogether are included in our research.
Criterion 1: a business model is innovative if it enlarges the current market or fundamentally changes the market.
Success
Also the second criterion can be identified from the research question. We focus on business models that became a success. Now, business model success can be described in many ways. At the moment, there is no consensus in literature about what entails a successful business model. Looking at profitability for example can be problematic, as companies often do not provide financial data on separate business models. In addition, it often takes a long time before innovative business models generate positive cash flows. An other option is to look at innovation or entrepreneurial awards: there are many competitions in which successful companies are awarded for their innovative business. This research applies both indicators of successful business models: for every individual case it is established whether the business model in question is profitable or has received an award.
Criterion 2: a business model is successful when it generates profits, or the company has received a relevant entrepreneurial award.
Validation and reliability
Validation, the question if the findings are really in line with the real world (Saunders et al., 2000), is one of the main perceived weaknesses of performing a case study. Quite often, researchers point to the fact that a single case or multiple case study cannot lead to generalizable findings, hence building theories. Yin (2003) argues however that with several tactics, the validity of the case study research can be increased. Below a number of measures, relevant for this research, are discussed.
- Case study protocol: the case study protocol increases the reliability of the research, as other investigators can try to replicate the research on the same case study.
- Review of draft: it is essential that the informants who are questioned agree with the actual facts used in the case study. Having key informants review the drafts of a case study report will therefore enhance the validity of the research.
- Multiple sources: drawing conclusions from one source of evidence could lead to a lack of information or biased assumptions. In reality, there may be more drivers of business models than apparent from an early meeting report. Additional data collection, e.g. with the use of an interview, could provide supplementary insights. This is also called triangulation – the events of the case study are supported by multiple sources of evidence (Yin, 2003).
- Replication: in order to generalize the results, it is important that the findings of one case are replicated: the theory has to be tested in other cases, in order to achieve validity.
3.3 Data collection methods
In the former section, the advantages of multiple data collection methods have been motivated. Below, the methods for data collection are discussed more extensively. First, the details of the cases are provided, such as the time period and number of cases. After this, the preparation phase of the research is explained, including the use of a protocol and a pilot-study. Finally, a description is provided of the analysis of the several case studies – how we link the data to the findings.
Details
In total, seven case studies where performed in the period between July and November 2007. For every case, both secondary was collected and interviews were performed with people directly involved in the creation of the business model. Most interviews took about an hour and were recorded.
Secondary data
Information on the building blocks and drivers of business models can also be derived from secondary data sources. Secondary data sources include: annual reports, meeting notes, memo’s, and brochures. Next to this, other researchers or journalists may have performed a research at the company, which may provide valuable information. So, also newspapers, business journals and websites are scanned for information about the specific case.
Case study protocol
Although secondary data could provide much information about the business model of a certain company, in most cases this is not sufficient. Especially information about the drivers of a business model and the process in which the model evolved is not included in secondary sources. That is why for every case, next to secondary data, at least one interview was performed. In this interview, the two main themes of this research where asked: the building blocks of the business model and the drivers by which it came into existence.
Questions in the final interview protocol have to be linked with the theoretical concepts of the conceptual model. Below, the approach of Emans (2002) is followed to achieve the connection between theory and questions.
First, the theoretical variables are formulated, that summarize the core information of the research. Second, several ‘indicators’ are constructed that represent the theoretical variable in practise. Finally, the indicator variables influence the answering options in the interview (e.g. closed/open questions). See table 3.1 below.
Table 3.1: From theory to indicators
Theoretical variable Indicator(s) Answering system
General business description History, Mission, Strategy, Organization, Products/services.
Open Business model description Product, Customer Interface,
Infrastructure management, Financial aspects.
External drivers (general) Demographics, Regulation, Economics, Technology, Society.
Open/closed External drivers (value
system)
Suppliers, clients, competitors, consultants.
Open/closed
Selectors - Open
Gatekeeper - Open
Internal drivers Physical resources, Human capital resources, Organizational
resources.
Open/closed
Process of BM innovation* Number of people involved, when, time, functions.
Open
* This variable describes the process of business model innovation. When was it invented? How many people where involved? What were their positions? How long did it take to construct the business model?
As the research becomes more exploratory, the less structured the interview will be (Saunders et al., 2000). For this reason, the final interview protocol does not contain direct questions about the building blocks or certain drivers. Instead, the questions are open and avoid confusion of definitions, which happens often with a concept like the business model (see supplement 1, interview protocol).
After conducting the several data collection methods described in the former section, the data has to be analysed. Especially for the case study research, containing qualitative data, it is highly important that the causal relations between data and theory become evident.
In order to achieve this, table 3.2 has been created. This table explicates the road between a data source and the variable in the conceptual model. Through this, the analysis is performed in a more structured way and becomes valid.
Pilot case study
Table 3.2: From data to theory
Data collection method Type of data / question Variable
Secondary data Annual reports, brochures, company website
Building blocks Articles, meeting notes, memo’s,
blogs, websites.
BM drivers
Interview* Question 1 Business description
Question 2/3 Building blocks
Question 4 Process of BM
innovation
Question 4 Selectors/gatekeepers
Question 5 BM drivers
4. Findings
This chapter describes the findings from the seven case studies that have been conducted. In each case, three subjects are central: a description of the business model, the drivers of business model creation, and the process of how the business model emerged. All cases are discussed below and analysed in the next chapter.
4.1 Achmea Health
Achmea Health is a business unit within Achmea, a large Dutch insurance company. Achmea offers a wide range of insurance products to both consumers and businesses. The Achmea Health concept is centred around two recent social developments: health and vitality. Traditionally, health insurance companies focussed on cure and care: when a customer developed a health problem, the insurance company was involved in providing allowances so the patient could recover. However, as health costs increased in all modern societies, so did the costs for the insurance companies. Consequently, insurance companies started to shift their attention to prevention, instead of only curing. Achmea Health is a concept that combines different services to enhance people’s health, such as healthcentres, a website and consultancy services for companies.
“We want people to become aware of the influence of their own health. Our goal is not to teach people how they should live. Instead, by providing them information about the consequences of a certain living style, we would like to change behaviours. The four pillars of a healthy life a very important in this context: food, exercise, sleeping and relaxing”.
- Business Manager Achmea Health Innovation
The website of Achmea Health is very important for the concept. Here, clients can access information about food and exercise and can order several health-related products. Additionally, Achmea Health has several healthcentres in the Netherlands, where people can sport or talk to health experts. Achmea clients have an advantage over regular customers, as they receive a discount to use the facilities. Next to private clients, Achmea Health also offers services to business clients, who seek advice about the absence of their employees due to sickness.
“As a result of a tight labour market, businesses increasingly recognise the importance of a policy for prevention and managing sick-leave – a service we can provide them, because of our expertise. We predict that within 10 years, employers will be evaluating the lifestyle of their workers. Achmea Health is perfectly positioned to benefit from this development”.
- Business Manager Achmea Health Innovation
Furthermore, Achmea Health improves the awareness of the Achmea brand. Through the Healthcentres and the website customers become more familiar with the brand and become more loyal. It provides the company with a competitive advantage over its rivals, who have not developed a prevention concept this extensively.
Achmea Health was developed ten years ago, by the director of the division Care: Mr. Hans Visser. He was one of the first in the insurance industry that recognised the increasing importance of healthcare prevention. Achmea adopted an ‘emerging strategy’: concept started with a magazine and several healthcentres, but later several changes were made to the concept.
“In the beginning, we sold all the services under the Achmea Health brand. After some time however, we noticed that consumers were confused, as they could not establish a link between their insurance brand and the Achmea Health concept. We therefore switched to the ‘intel inside principle’: returning to the original brands, such as Zilveren Kruis, Interpolis, Groene Land, and adding the label of Achmea Health”.
- Business Manager Achmea Health Innovation
In order to execute the concept of Achmea Health, Achmea cooperated with a number of preferred suppliers: companies with a certain expertise that Achmea lacked itself. For example a developer for the website, a publisher for the magazine and designers of the healthcentres. These capabilities are not unique however, so Achmea could have cooperated with other suppliers. Acceptation of the concept within the organization of Achmea went smooth. For this, it was very important that a person from the executive board was supporting the concept. Within months after the idea for Achmea Health emerged, the concept was implemented. In the first years after implementation, Achmea Health was not profitable, as Achmea had to adapt the concept to the preferences of the consumer. Additionally, the prevention market was very small. Currently, Achmea Health is a profitable business unit within Achmea, generating revenues of circa 10-15 million Euro. It is predicted that the market for prevention services will continue to grow rapidly in the coming years, from a 1% share of total revenues to around 10%. As a prime mover in this market, Achmea Health has obtained a highly competitive position to benefit from these developments.
4.2 B/N PanelWizard
The PanelWizard is an online market research tool, developed by the company kien. Kien was founded in 1992 as B&N Marketing by two alumni of the University of Groningen; Steven Noordam and Ivo van den Brink. Both studied Economics in Groningen and started B&N Marketing as a traditional market research agency. B&N Marketing provided marketing research for companies looking for information about consumers preferences and product perceptions, using survey-based research methodologies. From 2008, B&N Marketing was renamed as kien.
The PanelWizard is an innovative concept in two aspects. First, with the PanelWizard it is not kien that is performing the market research, but the client – a company with a specific market question (e.g. consumer preferences). Using the online tool on www.panelwizard.nl, the client can determine the questions and the analysis. Questions can be asked at a fixed pool of around 20.000 respondents, consisting of Dutch citizens from all parts of society. The advantage of this online tool in comparison with traditional surveys is that clients can obtain answers on the most relevant questions, whenever they need it and with a quick response. Traditional surveys needed months of planning and it often took a long time before results of the surveys were obtained. The respondents of the PanelWizard are offered an incentive to participate in the pool: for every question answered, they receive a financial compensation of EUR 0,10. On the PanelWizard website every respondent has a personal account, on which they can track their current budget and can determine whether the budget has to be transferred to their bank account or a charity. The second innovative aspect of the PanelWizard is that it allows its clients much more flexibility with the questions: every question at respondents can be asked in a different way and at a different group of respondents. In that sense, every research question is a separate research.
The rise of internet was crucial for the realization and success of the PanelWizard. Without internet, the concept could simply not exist. Important resources for the PanelWizard are the technology behind the website and database and the knowledge with regard to market research methodologies. Kien cooperates with several software- and technology providers to develop its website and database. Revenue is generated by charging clients an unspecified amount for every question asked, depending on the number of respondents, the type of question (open vs. closed) and the research method. Around 80% of turnover comes from multinational companies, the other 20% comes from small and medium sized enterprises (SME’s). As it is possible to ask a single question at the pool of respondents, market research also became available for smaller companies. At the moment however, the number of SME’s applying the PanelWizard is relatively limited. The total revenue amounts to around EUR 2 to 4 ml.
Several developments led to the creation of the PanelWizard. The first development was the need for easy-access market research, both for big companies and SME’s. Traditionally, market research was only performed by big research agencies, that made the product very costly. Furthermore, companies could not approach the respondents directly, the research agency acted as an intermediary. The PanelWizard enabled clients to directly ask questions to consumers and limit the number of questions, thereby reducing costs. The second development that created a need for the PanelWizard was the negative reputation of traditional market research, as a consequence of approaching potential respondents during the evening. Third, because of mobile communications and email and decreasing users of fixed phone lines, databases of potential respondents were shrinking and aging. There was therefore an increased need for panels of respondents. Finally, the growth of internet was essential to make the PanelWizard concept technically possible.
“Although all of these development posed threats to the traditional market research profession, we saw opportunities for a new online service – providing the client with do-it-yourself analysis tools and a panel of respondents”.
