Eight Models of Business Models, & Why They’re Important

The term Business Model is one that gets thrown around a lot these days. Even though it might sound like a buzzword to you, it’s important to understand what a business model is, and how they are useful.

One of the confusing things about the business model concept is that there are a wide variety of models of business models, and it seems as though everyone that talks about them makes up a new one. This can be frustrating if you are trying to figure out how to use the concept.

At their core, all business models address this questions: how do we sustainably deliver value to our customers? In this instance, the sustainable part refers to your organisation – how can you deliver value so that you’re still around in the future?

In a special issue of the journal Long Range Planning, Charles Baden-Fuller and Mary Morgan say that business models can serve three different purposes. They can describe different kinds and types of businesses. This is critical if we are trying to study them analytically. They can be short-hand descriptions of how firms operate – the primary value here is that you can use the business model to ensure that you have strategic fit across activities. Or they can be role models – you can use them to describe how you want your organisation to function.

More recently, Steve Blank has added another use – he says that business models are hypotheses about how your organisation might be able to create value for customers (see my discussion of this here).

To help illustrate some of the important points about business models, here are some of the models of business models that I’ve run across. The list isn’t comprehensive, so I apologise to anyone that I’ve forgotten – it’s simply due to my ignorance.

  1. Value Networks from Verna Allee: Verna was working with some of the basic concepts of business models in the 90s. One of the tools that she developed is Value Network Mapping:

    Key points: value creation and exchange is at the core of understanding business models. You need to clearly articulate how you create value, and for whom. The other key point here is that value isn’t just about money. You can also create and exchange intangible value. You can see her latest work here in her book Value Networks and the True Nature of Collaboration.

  2. Henry Chesbrough: described business models in an article with Richard Rosenbloom and in his book Open Innovation. Here is what his business model looks like:

    businessmodel

    Key points: new innovations often require new business models. This is where the idea of business model innovation really started to gain traction. Chesbrough didn’t just describe business models, he also discussed how changing a business model can be an innovation just by itself. I’m beginning to suspect that all new innovations require new business models…

  3. Strategy Diamond: this is a strategy tool developed by Hambrick & Fredrickson. They talk about the importance of having an integrated strategy, which looks like this:

    Key points: the first key point here is that a good business model is integrated. All of the elements need to be consistent with and support the others. If you change one element, it’s likely that you’ll need to change all of them. Second, this model illustrates how closely linked strategy and business models are. When you design a business model, you can’t do it without clearly articulating a strategy.

  4. Patrick Staehler: wrote a PhD called Business Models in the Digital Economy that was published in 2001. His business model looks like this:

    Key points: the thing I like best about Staehler’s model are the three bottom boxes: Leadership Style, Relationship Style and Values. Think about that in relation to the point above about integration. If you change the relationship style within your organisation, you’ll likely need to change the rest of your business model as well. Furthermore, this business model innovation could be a source of competitive advantage. This is a very powerful point.

  5. Business Model Canvas: around the same time that Staehler was writing his PhD on business models, Alex Osterwalder as also writing a PhD on business model innovation. He developed a tool called the Business Model Canvas. He has subsequently published a book called Business Model Generation, which is all over the place now, along with a number of other analytical tools. Here is his version, as modified by Steve Blank:

    Key points: this is where the business model concept has started to go mainstream – it’s astonishing how well this version of business models is doing right now. Osterwalder has done a great job of promoting the idea, and making it genuinely useful. This version of business models proves that it is a practical tool that you can use to figure out where your organisation should be heading.

  6. Long Range Planning: the special issue mentioned above makes a couple of important contributions. There is a new model of business models in the paper by David Teece, but it is more of a model to use in description if you are trying to study these academically. It’s not really one that you could use very easily within a firm for analysis.

    Key points: the issue with the Teece model illustrates the point that Baden-Fuller and Morgan make about the different uses of the business model concept. Teece’s model is designed solely for description/classification. So you can run into approaches for business models that aren’t as practical. The second point in the special issue is this: about 2/3 of businesses surveyed in one of the papers can’t articulate what their business model really is. This is alarming. It also raises the point that every organisation has a business model, whether you have consciously thought about it or not. If you’re trying to develop business strategy, it is essential to actually give this some thought.

  7. Seizing the White Space: Mark Johnson works with Clayton Christensen, and Johnson’s book from last year has another model of business models. The website has a bunch of useful resources, and the book has some great stories about business model innovation. His model looks like this:

    Key points: so now we have models of business models with 4,5,6,9 and 12 components. The same core elements keep turning up. For me, I don’t care which business model version you use, and picking the right one depends on what you’re trying to accomplish. Personally, I like the Chesbrough version because of the emphasis on networks, which I think is critical. On the other hand, the Business Model Canvas is getting easier to use now because of the substantial amount of resources that are building up around it.

    People build their own model for different reasons, but it’s important to understand that they are all trying to find ways to get at essentially the same issues. There isn’t one that is absolutely correct. So pick whichever one resonates the most with you to use.

  8. Escape Velocity: the latest book by Geoffrey Moore is fantastic. In it he includes a 9-point Market Strategy Framework, which includes elements like Target Customer, Compelling Reason to Buy, Partners and Allies, etc. If you look at it, it’s outlining a business model.

    Key points: like I said earlier, any time you start thinking about strategy, you’re thinking about business models. So even frameworks that aren’t being put forward as business models really are business models.

    1. Business models are important. They are an important tool that can be used to augment product and service innovations, to link innovation to strategy, to co-ordinate activities within an organisation, and they can be a source of innovation as well.

      There are many models of business models out there. You can use whichever makes the most sense to you. But it’s important to use one.

      Follow up post: Three Things You Can Do With a Business Model.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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45 thoughts on “Eight Models of Business Models, & Why They’re Important

  1. Tim- a most helpful review and a real reminder of the ‘complexity’ of suggested frameworks out there for BM- you could add many more as you say.

    As you are aware I favour the ones that are easy to grasp and communicate and fluid enough to keep re-working. The older BM was left as static and in todays world that is not a good place to be.

    The growing issue is what feeds into the BM and what needs to be underpinning the result- the one big bite is Business Architecture.

    Also a frame for implications and change when you move from an existing and established, well embeddded BM to the new design. This is the real current ‘freeze’ point that none suggesting BM’s have really resolved. A BM impact change canvas perhaps?

  2. How to include dynamics is a huge problem in nearly every management model – it’s definitely an issue. It’s one that I’ve done a bit of work on in my research, but I haven’t written about it as much here. It’s a really difficult topic, but important for us to make some progress on it.

  3. Tim, I agree that dynamics in business modeling is necessary. We have presented a paper in the last LATAM System Dynamics Chapter. Let me know if you are interested in it and I can send it to you.
    Thanks,
    Juan

    • Hi Juan!

      I´m also interested in your LATAM System Dynamics! Is´t possible to to get some paper or demo, becouse I’m doing a doctoral study of fast-growing SMEs.

      I´ll wait to hear of you and your Latam System D.

      Thanks,
      Tapani Lehto
      University of Jyväskylä, Finland

      mail: Tapani.V.Lehto@jyu.fi
      ph. +358 (0)400 305732

  4. Thanks for the helpful overview of business models. You might be interested in Agile Strategy framework of Michael Lurie. In my business model work, I end up with Patrick’s framework as I really believe in the role of values/culture in making a business model hard to copy. I also focus on value promise (Customer benefits less costs to acquire benefits) versus value proposition as the former is a more powerful concept for aligning people internally and creating ongoing improvements in differentiators.

  5. In a constantly a dynamic market, organizations need to consider the internal and the external factors that affect their sustainability and viability in the industry.
    As I understand the 8 models can be use for analyzing business, or to monitor the primary operations and their viability to the organization’s strategy or to be a role model which I strongly doubt.
    I don’t believe that organizations can have role model !! There is nothing static in today’s business arena; everything is dynamic weather internal or external: resources, expertise, plans, capabilities, markets, competitors, ..etc.
    How about innovating in the strategy itself and create your own model based on your position in the market ?
    How about adopt a blue ocean strategy, and follow your own business model ?

  6. The simplest model of a business model that I know of and which surprisingly wasn’t listed here is a series of three questions: What? To Whom? and How?. In my experience these translate pretty well to the more complex terms of value proposition, target segment and production/revenue model.

    • Thanks for the comment Topias. You raise a good point. They do translate across to at least three of the common categories, and you can certainly make a good start by answering those questions. I still think that there is a benefit to thinking through the more complicated models in a systematic manner, both to assess the fit of your activities and also to evaluate innovation opportunities. But you’re correct in saying that you can have a good impact with simpler models as well.

  7. Greetings! and Thank you for the obvious work you’ve put into this.

    I have a B.S. in Finance from SCC, but haven’t studied business models in nearly a quarter century, so please bear with me.

    I remember being taught there were 4 basic business models, all having certain benefits and weaknesses. Unfortunately I’ve forgotten the terms for the two incorporation approaches, each of which I describe below (along with the two I DO know). Maybe business model isn’t the right word. Still, I can’t seem to find the proper terms and it’s eating away at me. Hopefully you can inform me as to what the right terms are for the latter 2 below
    The 4 were as follows::

    1. Sole Proprietorship
    2. Partnership, equal or otherwise
    3. Simple(?) Incorporation, with all products being produced and sold under the same name. Good examples of this would be: Yamaha, BMW, Honda. (Obviously the first one for which i don’t know the proper term, or even what the proper term is for these 4 combined).
    4. Segmented(?) Incorporation (Ditto the proper term. See: The Limited, Sears, Coca Cola, Yum Corp. as examples)

    Anyway, if you could remind me what term one is supposed to refer to re: these different approaches to business, as well as what the proper terms of the latter 2 are, I’d be grateful.

    Happy Holidays,

    ART