Business models

Business model can be defined in many ways. Chesbrough & Rosenbloom (2002). de-scribes that a business model is a way of doing business so that the company can sus-tain its operations, which eventually translates to the fact that it needs to make revenue with those operations. More precisely this is highlighted by pointing out where the com-pany is in the value chain. Kaplan (2012 p. 19). simplifies this by stating that business model is how a company makes, provides, and captures value.

In other words, a business model of a company is describing the strategy that is being implemented through organizational processes, systems, and structures. Osterwalder

& Pigneur (2010). are defining business model with system called business model can-vas. The system consists of nine different sections that help to understand different as-pects of the business model. These nine sections are:

1. Customer Segments are the organizations and individuals that the business aims to serve. The goal is to satisfy the customers in effective way to achieve profitable business. Therefore, the customers can be defined more precisely to serve the needs of the specific customer group. (Oesterwalder & Pigneur 2010, p. 21-22).

2. Value Propositions is why a customer decides to choose one company over another. It fulfils the specific customer segments needs or solves their problem with a specific package of products and or services. Value proposition can be defined as a bundle of benefits that is provided to customers by the company.

(Oesterwalder & Pigneur 2010, p. 24-25).

The purpose of business model is to create value for the customers. Therefore, the heart of the business model can be described by telling how it creates value and for whom. One way of defining the value proposition more precisely is by answering to a question, what is the task that the customer hires us to fulfil. For that reason, value propositions should be done by thinking from the perspective of the customer to make the propositions as appealing as possible. (Kaplan 2012, p. 20-21). The value proposi-tion highlights how the value is created, but it is as important for the providing company to know how to capture some of the value as profitable revenue. The challenge is that, commonly the most appealing value propositions are open technologies, which makes

capturing the value more difficult. Therefore, finding the balance between how appeal-ing the proposition is and how easy it is to capture the value. Aspects that effect also to how appealing the value proposition is, are factors like price, availability, level of ser-vice. (Chesbrough, 2007).

3. Channels are the links between the company and the customer. They are ways of communicating and distributing the value propositions to the specific cus-tomer segments. (Oesterwalder & Pigneur 2010, p. 27-28). The defined value propositions need to be delivered to the customers with consistent, reliable, and scalable way. Therefore, the channels are just as important elements of the business model as the value propositions, they are describing what are the op-erative means of delivering the value proposition. Those opop-erative means and actions can be done internally or also externally such as by utilizing partners and distributors to deliver the value to the customers. (Kaplan 2012, p. 22).

The channels of delivering value propositions are best described by using operating models. Instead of organization charts and structures that describe only the hierar-chical order of the company, operating models highlight the flow of the value delivery process. Operating models showcase how the company’s functions are linked together and how they are linked to external functions such as partners delivery processes.

(Kaplan 2012 p. 22).

4. Customer Relationships are the established relationships that the company has with specific customer segment. The relationship can vary from one cus-tomer segment to another and is something that should be defined by the com-pany when the relationship with the customer is being built. (Oesterwalder &

Pigneur 2010, p. 29-31).

5. Revenue Streams are the cash that the company gets from different customer segments. The revenue streams are defined by the company based on what they assume the customer is willing to pay for the value proposition they are de-livering through the channels. The pricing mechanisms of different revenue streams might differ from each other. (Oesterwalder & Pigneur 2010, p. 32-33).

Different revenue streams can be described also by defining how the company is cap-turing value. In plain English this means who is paying for the value provided and how much. This can be then reflected with the cost structure of the created value and the result should be positive to ensure profitable business. Since the gap between the OEM and the real end user of the product might consist of multiple different stages and intermediaries it is not always clear who finally pays the bill for the created value. For

this reason, the flow of the revenue streams needs to be understood by the party who designs the business model and calculates estimations of the profitability of value deliv-eries. (Kaplan 2012, p. 29-30).

There are different bases for revenue streams, they might be based on a leasing, rent-ing, subscription agreement or direct sales of the goods. Good example of innovative use of optimizing revenue streams is leasing and eventually selling the goods like Xerox does with their copiers. This way the revenue streams are designed for the whole life cycle of the specific value proposal. (Chesbrough, 2007).

6. Key Resources are the assets that are necessary to make the business model work. These assets allow the company to develop and provide the value propo-sitions, built, and maintain the relationships and make revenue for the company.

Different key resources can be internal of external based on the business model of the company. (Osterwalder & Pigneur 2010, p. 35-36).

7. Key Activities are the activities the key resources complete to make the busi-ness model work in action. These are actions that are required to make offering of value propositions possible, maintaining the relationships with the customers and other important aspects to earn revenues for the company. (Osterwalder &

Pigneur 2010, p. 37-38).

8. Key Partnerships is a network of different suppliers and partners that play sig-nificant role on the success of the business model. These alliances are created in different ways to achieve benefits such as lower level of risk or achieving more resources for specific key activities. (Osterwalder & Pigneur 2010, p. 39-40).

9. Cost Structure portraits the expenses of operating the business model. All the actions from creating the value proposition to maintaining the customer relation-ship creates costs that are described in the cost structure of the business model. Different business models are affected by the cost structure differently.

Some are more guided by the costs that others. (Osterwalder & Pigneur 2010, p. 41-42).

These different aspects of business model are then placed on a canvas as shown be-low in the figure 2.

Figure 2. Business model canvas adapted from (Osterwalder & Pigneur 2010).

Then you fill the canvas according to your business model elements as shown in the example figure 3 below.

Figure 3. iTunes as an example of using business model canvas to map you the business model adapted from (Osterwalder & Pigneur 2010).

Business models can be also categorized according to the company’s awareness as highlighted in the model Chesbrough (2007). showcased in his paper with the six differ-ent business model categories. The first category is called type one and it includes

companies that do not differentiate them self from other companies with their business model. They are selling based on the price and availability and are commonly commod-ity providers such as restaurants. The second category is more aware of their position and has some differentiation from their competitors. Usually, they are still lacking the needed resources to maintain the differentiation. This might lead into situation where one product or service might be success but the next one is not differentiating enough.

The third category has the resources to differentiate and offer services and products to different market segments. They are still lacking the ability to react to major technical innovations that might disrupt their offerings. The type four category business model is being aware of such signals from the market that might effect on the differentiation from the competitors. External ideas are harvested and utilized in the offering develop-ment. Type five category is allowing external parties to involve their self to the innova-tion process of new offerings and services. Companies with such business model also focus on their customers sub-customers to understand how their offering could benefit their customers the best possible way. The sixth and the last business model category includes adaptive business models that are changed according to the situation. It is more flexible for the current market demand than the other categories and include deep adaptation of internal and external ideas. (Chesbrough, 2007).

2.1.1 Service based business model

Due to the continuously progressive intensity on the original equipment manufacturing industry the rapid changes on market prices, demand and other key elements are pushing the decision makers towards rethinking of their business plans. Since the mar-gins on the products are decreasing, the profitability of the business needs to come elsewhere. Therefore, it is common to move towards service business. On the other end of this product service continuum, we have companies that base their business model purely on the products and possible services are just add-ons. The other end, services are the core of the business and products become the addons. (Gebauer et al.

2005, p. 14).

Since the manufacturing equipment industry is shifting towards services, it is common for the companies to expand their market scope by providing wider portfolio from goods to services. This utilization is commonly referred as servitization. With it, the tangible goods are not anymore in the obvious center of the business model. This change has been recognized but not necessarily always reacted by the companies, since it requires strategic changes, such as redesigning the business model to match the demand of new services and solutions. When this kind of change is implemented in product-based

company, it can be considered as an evolutionary change, and it will usually happen by increments over time. These increments will guide the way of thinking about the ser-vices on the product-to-serser-vices continuum from one extreme towards another. During the evolutionary change, the ideology eventually changes from services as addons to services as a core of the value provided. (Kindström 2010, p. 479-480).

To be able to implement these incremental steps towards service-based business model, company needs to realize that by changing just the value proposition to more service oriented is not enough to make permanent and effective change. All the as-pects of business model need to be aligned in a way that the value with the services can be created and captured in profitable and sustainable way. (Kindström 2010, p.

481-485).

2.1.2 Business model decisions of SME

The service-based business model might be even more valuable for a small and me-dium sized enterprises (from now on referred as SMEs), since they are commonly more vulnerable for the competing businesses than larger companies would be. This is related to many different factors such as the lack of resources to keep the competitive advance through product innovations. Therefore, the service base business model might give more competitiveness through value adding solutions and without a need for extensive resource increases. Another option is to build strategic alliances with other SMEs or companies with more extensive resources. Through these alliances multiple parties might find effective methods to improve their business models with shared re-sources and common goals. (Rapaccini et al. 2019). When a SME is considering of business model changes to support the servitization they might find the needed

changes quite costly considering the resources of the company. In general, the benefits of servitization have proven to be still more beneficial than the costs of the needed changes to the business model. The limitation in this equation are the services that go outside the resources of the SME. For those services the external resources through alliances or other partnerships might be required for achieving the maximum benefit of the servitization. (Queiroz et al. 2020).

Due to the limited resources and informality of the SMEs the business model support-ing servitization should be designed in a way that it aligns company’s operations with the needs of their customers and does all of it by taking the internal resources and di-mensions into account. Another aspect that needs to be in the center of the change is the service-oriented culture inside the company. Business needs be done with an atti-tude that is focused on the service offering that provides value to the customers. On

top of this all, servitization requires a business model that highlights the need of inter-nal and exterinter-nal coordination. This includes also active communication in both direc-tions. Company needs information from the customers to be able to provide needed services and solutions. And on the other hand, customers need information about the availability and value adding features that the company can and will offer for them.

(Queiroz et al. 2020).

In Queiroz et al. (2020). paper, they researched the effect of the servitization for SMEs.

Their findings showcased that generally servitization has a positive effect on the perfor-mance of the SME. Unlike in many other similar researches, Queiroz et al. (2020).

founded that even a small service offering of basic services had already positive effect on the overall performance of the SME. They also found out that servitization in general helps SMEs to handle the environmental and competitive pressure better through ef-fective means of using resources through services and solutions instead of just product offering.