Defining business model

There does not exist one common definition of business model and its concept in the academic literature. Scholars are able to recognize commonalities between business model definitions and (Zott et al. 2011). The concept of business model can vary between people working either in business or technology (Osterwalder et al. 2005), and scholars have not been able to agree on one common concept of a business model (Zott et al. 2011). Whereas there does not exist a common definition for business model, it has been agreed at some length what business model is not. It is not a linear value chain from suppliers to customers, it does not equal to product-market strategy and has a little to do with positioning on the product-market, it is not a corporate strategy and finally, it cannot only concern the internal factors of a firm. Nevertheless, business model can create competitive advantage for a company. (Zott et al. 2011.)

Massa et al. (2017, 97) conclude that there are three different perspectives or interpretations of business models: 1. “an attribute of a real organization” 2. “a cognitive/linguistic schema”

and 3. “a formal conceptual representation of an organization’s activities”. Zott et al. (2011) note that business model studies do not define the concept, in which business model refers to.

Massa et al. (2017) agree and state that current research fails to acknowledge which of the three interpretations is used in a specific study. Although it is not mutually agreed what business model is, business model scholars agree that is an important new unit of analysis (Zott et al.

2011).

At a general level, business model describes how companies do business and create value. It is a steel wire, which composes a structure for company’s value creation and existence. According to Landau et al. (2016), there finds two distinctive concepts of business models that have been accepted by scholars. Teece (2010) introduced value-based perspective whereas Zott and Amit (2010) present activity system perspective based on their earlier research on e-businesses in 2001. Although these views offer different perspectives, it can be argued that they are complementary of each other (Landau et al. 2016). I choose to concentrate on activity system perspective in this thesis, as it is supported by earlier literature, it stresses the importance of holistic view of business operations (Zott & Amit 2010), it is argued to be useful also when analyzing traditional companies (Landeau et al. 2016) and because in business model thinking, scholars’ emphasize systemic approach on doing business (Zott et al. 2011).

Business model is built of different components. While the content of the components is somewhat unique to specific companies, the components themselves should be unified across the businesses. In activity system perspective (Figure 2), Amit and Zott (2001, 494-495) define business model as “the design of transaction content, structure, and governance to create value through the exploitation of business opportunities”. Business model is seen to consist of design elements and design themes. Design elements, content, structure and governance, are the architecture and frame of a business model. Content refers to various activities that link to value creation. Structure refers to the way how activities are linked with each other. Governance refers to the unit, which performs the activities mentioned in content. This part of a business model explains how company does business. The second part, design themes, describe how companies create value. Such themes are novelty, lock-in, complementarities and efficiency.

Business model, that is focused on novelty creates value by introducing new activities in its content, structure of governance. Lock-in refers to a way that company maintains the interest of third parties to take part in the business and it can be a result either from structure, content or governance. When focusing on complementarities, the value created with multiple activities is greater than with separated activities. Finally, business models with efficiency-centered focus minimize transaction costs with the choices of their business model construct. (Zott & Amit 2010.)

Figure 2. Business model construct: Activity system perspective (Amit & Zott 2001; Zott & Amit 2010)

Business model can be seen to consist of two types of elements, choices and consequences. The choices that management makes always lead to a certain consequence. All of the elements will eventually lead to a holistic picture of a business model. (Casadesus-Masanell & Ricart 2010.) Whereas the elements are always choices regardless of a company, it is quite vague to try to

describe elements of a business model as only choices and consequences. It will leave the construct to seem superficial. Casadesus-Masanell and Ricart (2010) argue that strict description of the elements can create boundaries for practitioners on how to build their business models.

Why it is so important to raise questions about business models? And how can business models serve the companies? Business models are not only definitions and tools, they can also serve a bigger purpose in a company. Osterwalder (2004) suggests that business models can help companies understand, share, analyze, manage and prospect the business logic of a company.

Oftentimes, the elements of business model are assumed to be as they are and communicated on an abstract level, without guarantee for understanding. The suggestion of different streams of use for business model (Osterwalder 2004) can help companies to be proactive in communication, educate their employees and encourage masses to suggest changes to it.

Business models are an essential part of innovating new products and services, especially in technology context. Fluctuating competitive environment requires companies to re-think their operations and functions. New technological innovations (Teece 2010; Zott et al. 2011; Tallman et al. 2018) and changes in economy such as global connectivity (Tallman et al. 2018) are key drivers in transforming companies’ business models. Saebi et al. (2017) found empirical proof that threats in the external business environment forecasts forthcoming changes in current business model. Additionally, emerging markets and opportunities related to their economic growth force companies to innovate and re-think their value creation and capture processes (Tallman et al. 2018).

Business models change during company’s lifecycle due to internal or external events. Saebi et al. (2017) propose that business model adaptation occurs when management is proactive in aligning business model to challenge the external opportunities and threats. Additionally, they propose the term business model innovation to be used when a company is proactive in innovating the business model in attempt to disrupt the existing market. The spark for innovation can be caused either by internal or external factors. Companies are more likely to adapt their business models when a threat they are facing is more rigorous, but the adaptability does not increase in a case of a on opportunity (Saebi et al. 2017). Business model can itself represent a new innovation (Teece 2010; Zott et al. 2011). It is found out that novelty-centered business models, introduced before, are associated with positive firm performance even with limited resources and uncertainty of the business model and its reliability (Zott & Amit 2007).

New innovations in ways to organize business models can represent substantial advantage for companies but it also challenges them in investing in people. A company needs employees, who have the talent and ability to challenge the status quo.

Technology and its advantages often offer advantages for start-ups when comparing to multinational enterprises. Company lifecycles are decreasing in time due to rapid growth in adaptation of technology. (Tallman et al. 2018.) However, technology is only a tool in business, and it does not automatically create value. In the context of technological innovations, strategic analysis and business model are required to acquire commercial success (Chesbrough &

Rosenbloom 2002; Teece 2010; Zott et al. 2011). It is a delusion to assume that technology on its own can change company’s path and create success. Carefully designed business model is a key to create and capture value.

Business model design and implementation demand strong dynamic capabilities (Teece &

Linden 2017). Rachinger et al. (2018) found empirical proof that dynamic capabilities are important in designing business model, especially in the early phases. They also state that, dynamic capabilities or the lack of them will bring future challenges to companies trying to adapt their business models. Dynamic capabilities will be discussed in chapter 2.3 Competitive strategy.

Literature of BMs has acknowledged the relationship between changing or creating a new business model and external environment, but it is not yet connected to integrating a new digital platform business model into existing operations and further enhancing the competitiveness.

Moreover, Tallman et al. (2018) state that technology offers advantages for start-ups but does not acknowledge how more established companies can take the advantage of the technology in regard of integrating a new digital platform business model. Activity system perspective introduced by Amit and Zott (2001) gives guidelines on how business creates value and does business but then again, it has not been applied in B2B context and originally it was introduced in terms of e-businesses. On the other hand, it is seen as a suitable perspective in regard of traditional companies. By concentrating on business model and especially the value creation part, it becomes possible to explain how a company can further enhance their competitiveness.