Definition of a business model
Question:
Discuss about the Business Model for Activity System.
This essay will be discussing the understanding pertaining to the concept of business model along with the ways in which theoretical understanding pertaining to the business models can be utilised for the explanation of innovation process, value appropriation and value creations in organisations in real life. The academic literature with respect to the business model will be explored for the investigation of three major concepts of business models – “e-business model archetypes”, “business models as activity systems” and “business model as a cost / revenue architecture”. The investigation of such concepts will be performed both individually and also with regards to one another under the umbrella theme which is associated with the business models.
A business model is the articulation of logic. Data along with other evidence is provided by it which depict the ways in which the business leads to the creation as well as delivery of value to its customers. An outline regarding the architecture of costs, revenues and profits linked to the enterprise carrying out business provides that value is provided by the business model. The issues which are associated with a “good business model design” share an interrelationship with each other and lie at the core of building a sustainable competitive advantage. Thus, a business model is a description of the manner in which value is created and delivered to the customers by the enterprise and how payments that are received are converted to profits. If the business pioneers wish to derive profits from innovation, it is essential that they excel in business model design and product innovation and also understand options related to business design, technological trajectories and customer needs. It provides definition of the business logic that is needed for earning profits and after adoption it describes the manner in which the firm “goes to market”. For assuring competitive advantage, the business model should be efficient and effective (Teece, 2010).
Even though business models are an integral part of trading and also of economic behaviour, the concept of business model gained prevalence with internet advent in the mid-1990s and has picked up ever since (Teece, 2010). Certain authors are also of the view that the emergence of this concept and its use extensively might have been driven by internet’s extent (Amit & Zott, 2001). The other driving factors might be rapid growth in the markets that are emerging, interest in issues pertaining to “bottom of pyramid” and expanding industries as well as organisations that depend on post industrial technologies (Thompson & MacMillan, 2010) (Perkmann & Spicer, 2010).
The importance of good business model design
e-business refers to “doing business electronically”. It consists of e-markets, e-commerce and business that are internet based and the reference is to the organisations conducting commercial transactions with their buyers as well as their business partners via the internet (Mahadevan, 2000). Advances that have taken place recently in information technologies and communication like the emergence and also the rapid expansion that has taken place of the internet along with the swift derease in the costs of communication and commuting have led to new ways of creation and delivery of value that have resulted in opportunities for creating exchange mechanisms as well as transaction architectures of unconventional type (Amit & Zott, 2001). Along with it have come the possibilities for designing organisational plans that are new and span boundaries (Dunbar & Starbuck, 2006). Such developments have resulted in the opening of new horizons which facilitate designing of business models so that organisations are enabled to change in a fundamental way regarding the manner in which they not only organise but also engage in exchanges of economic nature within as well as across the boundaries of both the enterprise and industry (Mendelson, 2000). This also comprises the manner in which the interaction occurs between the customers and the suppliers (Brynjolfsson & Hitt, 2004). The principal driver for increasing attention to business models and consequently the emergence of theory related to the topics (Ghaziani & Ventresca, 2005) (Yip, 2004). Research on models of e-business may be organised into two complementary streams – firstly the generic e-business models providing typologies and secondly e-business model components.
Increasing attention has been received from business strategists and schools who have shown interest in providing explanation of the firm’s competitive advantage, performance and value creation.
Business model concept has been employed for explaining value creation in case of networked markets (Zott & Amit, 2008). The focus is on the activities of the firm with their network of partners. However, it has been acknowledged by the scholars that the business models are not executed by the firm in competitive vacuum and business models are used as a means for competition between firms (Casadesus-Masanell & Ricart, 2010). Hence, a potential source pertaining to competitive advantage is the business model (Markides & Charitou, 2004). The newer and effective models provide novelty that lead to value creation that is superior (Morris, Schindehutte, & Allen, 2005).
A central role can also be played by the business model to explain the firms’ performance. Business model is considered as a “unifying construct” for providing explanation of firm performance and its competitive advantage. It is described as a method by which the resources of the firm are built and used for offering better value to the customers and making money while doing this (Afuah, 2004).
The evolution of business models in the age of internet
Business models are also considered as extensions of central ideas in cases of business strategies. It might provide the firm a competitive advantage which is different from its market position. Enterprises addressing similar customer needs and pursuing similar strategies of product market can have varying business models (Zott & Amit, 2008). The strategy traditionally emphasises on competitive advantage, value capture and competition while the emphasis of business model concept is on joint value creation, partnership and cooperation (Mäkinen & Seppänen, 2007).
Business model also strongly revolves around the criteria of value creation which is customer focused (Mansfield & Fourie, 2004). As per this perspective, the pattern related to the economic exchanges of the firm with external parties is encompassed in the business model ( (Zott & Amit, 2008). The critical details regarding the value proposition of the firm for its different stakeholders and also the firm’s activity system are used for creation of value and its delivery to the customers (Seddon, Lewis, Freeman, & Shanks, 2004).
As per this perspective that is more functionalist, business model complements technology which is viewed as business model’s enabler and not a component of the concept. The competition and resources are not taken as components of the concept of business model. Its main logic is around the revenues and costs of the firm, the value proposition it provides to its customers along with the value capturing mechanisms. Hence, it is a means for innovation.
The business model conceptualisations have been utilised by strategy scholars with reference to the firm’s logic, its ways of operating and the way in which it creates values for the stakeholders. This notion on the surface appears the same as that of the notion of strategy. However, they are different and the business model reflects the realised strategy of the firm. It helps the firm in e-business, value creation, performance, sustaining competitive advantage and as a means of innovation by providing the customers with value proposition. The business models differ from strategy in cases of crucial contingencies on which a strategy that is well designed might be based.
In the business environment of today, there is nothing which remains still. There has been a constant increase in the rates of change faced by business organisations in previous five decades. Business environments have become highly volatile. These are mainly a resultant of “information and communication technology”, increase in the liberalisation as well as democratisation of the economies throughout the world. Hence, change has become inevitable and is a routine feature in a business. Therefore, the management needs to give it necessary attention for getting business performance that increases continuously (Thomas, 2014).
E-business and the emergence of new exchange mechanisms and organizational plans
An example of an organisation that had to change its business model is Google. Initially the company did not have a business model. It was unprofitable organisation in the beginning and was fumbling for stable revenue. After it made some profitable forays by sale of search appliances to businesses and also its own technology related to search to other search engines, a radical change of course took place for Google. AdWords program was launched by the company in 2003 through which businesses could advertise to people who were searching for certain items on Google.com. Overnight this turned out to be a success and Google became a search tool which proved to be very popular for the “advertising juggernaut”. $21 billion profit was reported by the company to be generated in 2008 through “advertising driven revenue”. AdWords still makes up a lion’s share of the total revenue as well as profits of Google.
Conclusion
Increase in understanding in relation to business models and the place that they hold in the corpus of the organisational as well as social sciences provide assistance in the understanding we form of various subjects like competitive advantage, strategy, innovation, competition and market behaviour. It also improves our understanding with regards to the firms as well as the roles that the business models play in changing business contexts.
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