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Business model innovation is an iterative and potentially circular process.[1]

A business model describes how a business organization creates, delivers, and captures value,[2] in economic, social, cultural or other contexts. The model describes the specific way in which the business conducts itself, spends, and earns money in a way that generates profit. The process of business model construction and modification is also called business model innovation and forms a part of business strategy.[1]

In theory and practice, the term business model is used for a broad range of informal and formal descriptions to represent core aspects of an organization or business, including purpose, business process, target customers, offerings, strategies, infrastructure, organizational structures, profit structures, sourcing, trading practices, and operational processes and policies including culture.

Context

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The literature has provided very diverse interpretations and definitions of a business model. A systematic review and analysis of manager responses to a survey defines business models as the design of organizational structures to enact a commercial opportunity.[3] Further extensions to this design logic emphasize the use of narrative or coherence in business model descriptions as mechanisms by which entrepreneurs create extraordinarily successful growth firms.[4]

Business models are used to describe and classify businesses, especially in an entrepreneurial setting, but they are also used by managers inside companies to explore possibilities for future development. Well-known business models can operate as "recipes" for creative managers.[5] Business models are also referred to in some instances within the context of accounting for purposes of public reporting.

Part of a series on
Strategy
Strategy topics
Analysis methods
Major thinkers
Concepts
Frameworks and tools

History

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According to the Oxford English Dictionary, the term "business model", a compound of business and model, was first used in 1832 in the sense of "a plan for the operation of a business".[6]

Over the years, business models have become much more sophisticated. The bait and hook business model (also referred to as the "razor and blades business model" or the "tied products business model") was introduced in the early 20th century. This involves offering a basic product at a very low cost, often at a loss (the "bait"), then charging compensatory recurring amounts for refills or associated products or services (the "hook"). Examples include: razor (bait) and blades (hook); cell phones (bait) and air time (hook); computer printers (bait) and ink cartridge refills (hook); and cameras (bait) and prints (hook). A variant of this model was employed by Adobe, a software developer that gave away its document reader free of charge but charged several hundred dollars for its document writer.

In the 1950s, new business models came from McDonald's Restaurants and Toyota. In the 1960s, the innovators were Wal-Mart and Hypermarkets. The 1970s saw new business models from FedEx and Toys R Us; the 1980s from Blockbuster, Home Depot, Intel, and Dell Computer; the 1990s from Southwest Airlines, Netflix, eBay, Amazon.com, and Starbucks.

Today, the type of business models might depend on how technology is used. For example, entrepreneurs on the internet have also created new models that depend entirely on existing or emergent technology. Using technology, businesses can reach a large number of customers with minimal costs. In addition, the rise of outsourcing and globalization has meant that business models must also account for strategic sourcing, complex supply chains and moves to collaborative, relational contracting structures.[7]

Theoretical and empirical insights

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Business administration
Accounting
Business entity (list)
Corporate governance
Corporate law
Corporate title
Economics
Finance
Types of management
Organization
Trade

Design logic and narrative coherence

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Design logic views the business model as an outcome of creating new organizational structures or changing existing structures to pursue a new opportunity. Gerry George and Adam Bock (2011) conducted a comprehensive literature review and surveyed managers to understand how they perceived the components of a business model.[3] In that analysis these authors show that there is a design logic behind how entrepreneurs and managers perceive and explain their business model. In further extensions to the design logic, George and Bock (2012) use case studies and the IBM survey data on business models in large companies, to describe how CEOs and entrepreneurs create narratives or stories in a coherent manner to move the business from one opportunity to another.[4] They also show that when the narrative is incoherent or the components of the story are misaligned, that these businesses tend to fail. They recommend ways in which the entrepreneur or CEO can create strong narratives for change. The business model concept is not without its critics (e.g., redundancy) and suggestions for further extensions (e.g., to nonmonetary exchange).[8]

Complementarities between partnering firms

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Berglund and Sandström (2013) argued that business models should be understood from an open systems perspective as opposed to being a firm-internal concern. Since innovating firms do not have executive control over their surrounding network, business model innovation tends to require soft power tactics with the goal of aligning heterogeneous interests.[9] In a study of collaborative research and external sourcing of technology, Hummel et al. (2010) similarly found that in deciding on business partners, it is important to make sure that both parties' business models are complementary.[10] For example, they found that it was important to identify the value drivers of potential partners by analyzing their business models, and that it is beneficial to find partner firms that understand key aspects of one's own firm's business model.[11]

The University of Tennessee conducted research into highly collaborative business relationships. Researchers codified their research into a sourcing business model known as Vested Outsourcing, a hybrid sourcing business model in which buyers and suppliers in an outsourcing or business relationship focus on shared values and goals to create an arrangement that is highly collaborative and mutually beneficial to each.[12]

Categorization

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From about 2012, some research and experimentation has theorized about a so-called "liquid business model".[13][14]

Shift from pipes to platforms

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Sangeet Paul Choudary distinguishes between two broad families of business models in an article in Wired magazine.[15] Choudary contrasts pipes (linear business models) with platforms (networked business models). In the case of pipes, firms create goods and services, push them out and sell them to customers. Value is produced upstream and consumed downstream. There is a linear flow, much like water flowing through a pipe. Unlike pipes, platforms do not just create and push stuff out. They allow users to create and consume value.

Alex Moazed, founder and CEO of Applico, defines a platform as a business model that creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers, of a given value.[16] As a result of digital transformation, it is the predominant business model of the 21st century.

In an op-ed on MarketWatch,[17] Choudary, Van Alstyne and Parker further explain how business models are moving from pipes to platforms, leading to disruption of entire industries.

Platform

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There are three elements to a successful platform business model.[18] The toolbox creates connection by making it easy for others to plug into the platform. This infrastructure enables interactions between participants. The magnet creates pull that attracts participants to the platform. For transaction platforms, both producers and consumers must be present to achieve critical mass. The matchmaker fosters the flow of value by making connections between producers and consumers. Data is at the heart of successful matchmaking, and distinguishes platforms from other business models.

Chen (2009) stated that the business model has to take into account the capabilities of Web 2.0, such as collective intelligence, network effects, user-generated content, and the possibility of self-improving systems. He suggested that the service industry such as the airline, traffic, transportation, hotel, restaurant, information and communications technology and online gaming industries will be able to benefit in adopting business models that take into account the characteristics of Web 2.0. He also emphasized that Business Model 2.0 has to take into account not just the technology effect of Web 2.0 but also the networking effect. He gave the example of the success story of Amazon in making huge revenues each year by developing an open platform that supports a community of companies that re-use Amazon's on-demand commerce services.[19][need quotation to verify]

Impacts of platform business models

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Jose van Dijck (2013) identifies three main ways that media platforms choose to monetize, which mark a change from traditional business models.[20] One is the subscription model, in which platforms charge users a small monthly fee in exchange for services. She notes that the model was ill-suited for those "accustomed to free content and services", leading to a variant, the freemium model. A second method is via advertising. Arguing that traditional advertising is no longer appealing to people used to "user-generated content and social networking", she states that companies now turn to strategies of customization and personalization in targeted advertising. Eric K. Clemons (2009) asserts that consumers no longer trust most commercial messages;[21] Van Dijck argues platforms are able to circumvent the issue through personal recommendations from friends or influencers on social media platforms, which can serve as a more subtle form of advertisement. Finally, a third common business model is monetization of data and metadata generated from the use of platforms.

Applications

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Malone et al.[22] found that some business models, as defined by them, indeed performed better than others in a dataset consisting of the largest U.S. firms, in the period 1998 through 2002, while they did not prove whether the existence of a business model mattered.

In the healthcare space, and in particular in companies that leverage the power of Artificial Intelligence, the design of business models is particularly challenging as there are a multitude of value creation mechanisms and a multitude of possible stakeholders. An emerging categorization has identified seven archetypes.[23]

The concept of a business model has been incorporated into certain accounting standards. For example, the International Accounting Standards Board (IASB) utilizes an "entity's business model for managing the financial assets" as a criterion for determining whether such assets should be measured at amortized cost or at fair value in its International Financial Reporting Standard, IFRS 9.[24][25][26][27] In their 2013 proposal for accounting for financial instruments, the Financial Accounting Standards Board also proposed a similar use of business model for classifying financial instruments.[28] The concept of business model has also been introduced into the accounting of deferred taxes under International Financial Reporting Standards with 2010 amendments to IAS 12 addressing deferred taxes related to investment property.[29][30][31]

Both IASB and FASB have proposed using the concept of business model in the context of reporting a lessor's lease income and lease expense within their joint project on accounting for leases.[32][33][34][35][36] In its 2016 lease accounting model, IFRS 16, the IASB chose not to include a criterion of "stand alone utility" in its lease definition because "entities might reach different conclusions for contracts that contain the same rights of use, depending on differences between customers' resources or suppliers' business models."[37] The concept has also been proposed as an approach for determining the measurement and classification when accounting for insurance contracts.[38][39] As a result of the increasing prominence the concept of business model has received in the context of financial reporting, the European Financial Reporting Advisory Group (EFRAG), which advises the European Union on endorsement of financial reporting standards, commenced a project on the "Role of the Business Model in Financial Reporting" in 2011.[40]

Design

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Business model design generally refers to the activity of designing a company's business model. It is part of the business development and business strategy process and involves design methods. Massa and Tucci (2014)[41] highlighted the difference between crafting a new business model when none is in place, as it is often the case with academic spinoffs and high technology entrepreneurship, and changing an existing business model, such as when the tooling company Hilti shifted from selling its tools to a leasing model. They suggested that the differences are so profound (for example, lack of resource in the former case and inertia and conflicts with existing configurations and organisational structures in the latter) that it could be worthwhile to adopt different terms for the two. They suggest business model design to refer to the process of crafting a business model when none is in place and business model reconfiguration for the process of changing an existing business model, also highlighting that the two processes are not mutually exclusive, meaning reconfiguration may involve steps which parallel those of designing a business model.

Economic consideration

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Al-Debei and Avison (2010) consider value finance as one of the main dimensions of business modelling which depicts information related to costing, pricing methods, and revenue structure. Stewart and Zhao (2000) defined the business model as "a statement of how a firm will make money and sustain its profit stream over time."[42]

Component consideration

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Osterwalder et al. (2005) consider the Business Model as the blueprint of how a company does business.[43] Slywotzky (1996) regards the business model as "the totality of how a company selects its customers, defines and differentiates it offerings, defines the tasks it will perform itself and those it will outsource, configures its resources, goes to market, creates utility for customers and captures profits."[44]

Strategic outcome

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Mayo and Brown (1999) considered the business model as "the design of key interdependent systems that create and sustain a competitive business."[45] Casadesus-Masanell and Ricart (2011) explain a business model as a set of "choices (policy, assets and governance)" and "consequences (flexible and rigid)" and underline the importance of considering "how it interacts with models of other players in the industry" instead of thinking of it in isolation.[46]

Definitions of design or development

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Zott and Amit (2009) consider business model design from the perspectives of design themes and design content. Design themes refer to the system's dominant value creation drivers and design content examines in greater detail the activities to be performed, the linking and sequencing of the activities and who will perform the activities.[47]

Design themes emphasis

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Environment-strategy-structure-operations business model development

Developing a framework for business model development with an emphasis on design themes, Lim (2010) proposed the environment-strategy-structure-operations (ESSO) business model development which takes into consideration the alignment of the organization's strategy with the organization's structure, operations, and the environmental factors in achieving competitive advantage in varying combination of cost, quality, time, flexibility, innovation and affective.[48]

Design content emphasis

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Business model design includes the modeling and description of a company's:

A business model design template can facilitate the process of designing and describing a company's business model. In a paper published in 2017,[49] Johnson demonstrated how matrix methods may usefully be deployed to characterise the architecture of resources, costs, and revenues that a business uses to create and deliver value to customers which defines its business model. Systematisation of this technique (Johnson settles on a business genomic code of seven matrix elements of a business model) would support a taxonomical approach to empirical studies of business models in the same way that Linnaeus' taxonomy revolutionised biology.

Daas et al. (2012) developed a decision support system (DSS) for business model design. In their study a decision support system (DSS) is developed to help SaaS in this process, based on a design approach consisting of a design process that is guided by various design methods.[50]

Examples

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Some digital media platforms use a "triple-product" business model in which infotainment (information and entertainment) is exchanged for attention and user surveillance data, which in turn is monetized for targeted ad revenue.[51]

In the early history of business models it was very typical to define business model types such as bricks-and-mortar or e-broker. However, these types usually describe only one aspect of the business (most often the revenue model). Therefore, more recent literature on business models concentrate on describing a business model as a whole, instead of only the most visible aspects.

The following examples provide an overview for various business model types that have been in discussion since the invention of term business model:

Bricks and clicks business model
Business model by which a company integrates both offline (bricks) and online (clicks) presences. One example of the bricks-and-clicks model is when a chain of stores allows the user to order products online, but lets them pick up their order at a local store.
Collective business models
Business system, organization or association typically composed of relatively large numbers of businesses, tradespersons or professionals in the same or related fields of endeavor, which pools resources, shares information or provides other benefits for their members. For example, a science park or high-tech campus provides shared resources (e.g. cleanrooms and other lab facilities) to the firms located on its premises, and in addition seeks to create an innovation community among these firms and their employees.[52]
Cutting out the middleman model
The removal of intermediaries in a supply chain: "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate (such as a distributor, wholesaler, broker, or agent), companies may now deal with every customer directly, for example via the Internet.
Direct sales model
Direct selling is marketing and selling products to consumers directly, away from a fixed retail location. Sales are typically made through party plan, one-to-one demonstrations, and other personal contact arrangements. A text book definition is: "The direct personal presentation, demonstration, and sale of products and services to consumers, usually in their homes or at their jobs."[53]
Distribution business models, various
Fee in, free out
Business model which works by charging the first client a fee for a service, while offering that service free of charge to subsequent clients.
Franchise
Franchising is the practice of using another firm's successful business model. For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. The franchisor's success is the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.
Sourcing business model
Sourcing Business Models are a systems-based approach to structuring supplier relationships. A sourcing business model is a type of business model that is applied to business relationships where more than one party needs to work with another party to be successful. There are seven sourcing business models that range from the transactional to investment-based. The seven models are: Basic Provider, Approved Provider, Preferred Provider, Performance-Based/Managed Services Model, Vested outsourcing Business Model, Shared Services Model, and Equity Partnership Model. Sourcing business models are targeted for procurement professionals who seek a modern approach to achieve the best fit between buyers and suppliers. Sourcing business model theory is based on a collaborative research effort by the University of Tennessee (UT), the Sourcing Industry Group (SIG), the Center for Outsourcing Research and Education (CORE), and the International Association for Contracts and Commercial Management (IACCM). This research formed the basis for the 2016 book, Strategic Sourcing in the New Economy: Harnessing the Potential of Sourcing Business Models in Modern Procurement.[54]
Freemium business model
Business model that works by offering basic Web services, or a basic downloadable digital product, for free, while charging a premium for advanced or special features.[55]
Pay what you can (PWYC)
A non-profit or for-profit business model which does not depend on set prices for its goods, but instead asks customers to pay what they feel the product or service is worth to them.[56][57] It is often used as a promotional tactic,[58] but can also be the regular method of doing business. It is a variation on the gift economy and cross-subsidization, in that it depends on reciprocity and trust to succeed.: "Pay what you want" (PWYW) is sometimes used synonymously, but "pay what you can" is often more oriented to charity or socially oriented uses, based more on ability to pay, while "pay what you want" is often more broadly oriented to perceived value in combination with willingness and ability to pay.
Value-added reseller model
Value Added Reseller is a model where a business makes something which is resold by other businesses but with modifications which add value to the original product or service. These modifications or additions are mostly industry specific in nature and are essential for the distribution. Businesses going for a VAR model have to develop a VAR network. It is one of the latest collaborative business models which can help in faster development cycles and is adopted by many Technology companies especially software.

Other examples of business models are:

Frameworks

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Although Webvan failed in its goal of disintermediating the North American supermarket industry, several supermarket chains (like Safeway Inc.) have launched their own delivery services to target the niche market to which Webvan catered.
Example of Business Model Canvas

Technology centric communities have defined "frameworks" for business modeling. These frameworks attempt to define a rigorous approach to defining business value streams. It is not clear, however, to what extent such frameworks are actually important for business planning. Business model frameworks represent the core aspect of any company; they involve "the totality of how a company selects its customers defines and differentiates its offerings, defines the tasks it will perform itself and those it will outsource, configures its resource, goes to market, creates utility for customers, and captures profits".[59] A business framework involves internal factors (market analysis; products/services promotion; development of trust; social influence and knowledge sharing) and external factors (competitors and technological aspects).[60]

Business reference model is a reference model, concentrating on the architectural aspects of the core business of an enterprise, service organization or government agency.
Technique developed by IBM to model and analyze an enterprise. It is a logical representation or map of business components or "building blocks" and can be depicted on a single page. It can be used to analyze the alignment of enterprise strategy with the organization's capabilities and investments, identify redundant or overlapping business capabilities, etc.
Business model used in strategic management and services marketing that treats service provision as an industrial process, subject to industrial optimization procedures
Developed by A. Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, the business model canvas[2][61] is one of the most used frameworks for describing the elements of business models.
The OGSM is developed by Marc van Eck and Ellen van Zanten of Business Openers into the 'Business plan on 1 page'. Translated in several languages all over the world. #1 Management book in The Netherlands in 2015. The foundation of Business plan on 1 page is the OGSM. Objectives, Goals, Strategies and Measures (dashboard and actions).
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The process of business model design is part of business strategy. Business model design and innovation refer to the way a firm (or a network of firms) defines its business logic at the strategic level.

In contrast, firms implement their business model at the operational level, through their business operations. This refers to their process-level activities, capabilities, functions and infrastructure (for example, their business processes and business process modeling), their organizational structures (e.g. organograms, workflows, human resources) and systems (e.g. information technology architecture, production lines).

The brand is a consequence of the business model and has a symbiotic relationship with it, because the business model determines the brand promise, and the brand equity becomes a feature of the model. Managing this is a task of integrated marketing.

The standard terminology and examples of business models do not apply to most nonprofit organizations, since their sources of income are generally not the same as the beneficiaries. The term 'funding model' is generally used instead.[62]

The model is defined by the organization's vision, mission, and values, as well as sets of boundaries for the organization—what products or services it will deliver, what customers or markets it will target, and what supply and delivery channels it will use. Mission and vision together make part of the overall business purpose. While the business model includes high-level strategies and tactical direction for how the organization will implement the model, it also includes the annual goals that set the specific steps the organization intends to undertake in the next year and the measures for their expected accomplishment. Each of these is likely to be part of internal documentation that is available to the internal auditor.

Business model innovation

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Business model innovation types[63]

When an organisation creates a new business model, the process is called business model innovation.[64][65] There is a range of reviews on the topic,[63][66][67] The concept facilitates the analysis and planning of transformations from one business model to another.[67] Frequent and successful business model innovation can increase an organisation's resilience to changes in its environment and if an organisation has the capability to do this, it can become a competitive advantage.[68] Although business model innovation promises financial returns,[69] periods of radical business model innovation can reduce the person-organization fit and thus lead to a greater fluctuation in the workforce.[70]

Business model adaptation

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As a specific instance of business model dynamics, a research strand derived from the evolving changes in business models, BMA identifies an update of the current business model to changes derived from the context. BMA can be innovative or not, depending on the degree of novelty of the changes implemented. As a consequence of the new context, several business model elements are promoted to answer those challenges, pivoting the business model towards new models. Companies adapt their business model when someone or something such as COVID-19 has disrupted the market. BMA could fit any organization, but incumbents are more motivated to adapt their current BM than to change it radically or create a new one.[71]

See also

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References

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Further reading

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Revisions and contributorsEdit on WikipediaRead on Wikipedia

Business model

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from Grokipedia
A business model is a that describes the rationale of how an creates, delivers, and captures value for its customers and stakeholders. It encompasses the core logic of a firm's operations, including the selection of activities, resources, and partnerships that enable to target markets while generating revenue streams to cover costs and ensure profitability. This framework transcends the boundaries of the individual firm, often involving interdependent activities with suppliers, partners, and customers to form a cohesive for value creation and appropriation. Central to understanding business models is their structure, often visualized through tools like the Business Model Canvas, which outlines nine key building blocks: customer segments, , channels, customer relationships, revenue streams, key resources, key activities, key partners, and cost structures. These elements address how a firm identifies and serves distinct groups of customers, solves their problems or meets their needs through tailored offerings, and manages the delivery, interaction, and monetization processes. For instance, the focuses on the bundle of products and services that provide benefits, while revenue streams detail mechanisms like sales, subscriptions, or licensing to convert value into financial returns. Business models play a critical strategic in firm performance and , serving as a mechanism to align internal decisions—such as structures and procedural norms—with external market alignments, including transaction partners and activities. Strategic objectives define an organization's long-term goals, direction, and competitive positioning, while the business model operationalizes the strategy by outlining how the organization creates, delivers, and captures value to achieve those objectives. Alignment between strategic objectives and the business model is essential, with strategy typically setting the course first and the business model designed or adapted to execute it effectively. Empirical studies confirm a significant relationship between distinct strategies and unique business models, particularly through strategic actions, and demonstrate that such alignment contributes to improved organizational performance. They enable organizations to exploit opportunities in dynamic environments by designing novel activity linkages, fostering lock-in through network effects, leveraging complementarities, and enhancing efficiency to reduce transaction costs. Effective business models not only support but also facilitate adaptation to technological and market changes, as seen in shifts from product-centric to service-oriented approaches in industries like and .

Fundamentals

Definition

A business model is a that describes the rationale of how an organization creates, delivers, and captures value. This definition, proposed by and Yves Pigneur, emphasizes the model's role as a strategic tool for articulating the fundamental logic underlying a firm's operations and economic viability. It serves as a blueprint for aligning activities with market needs, encompassing the mechanisms through which value is proposed to customers and transformed into sustainable . The core purposes of a business model include elucidating generation streams, outlining cost structures, and defining the offered to stakeholders such as , partners, and investors. By clarifying these elements, the model enables organizations to communicate their economic engine effectively, ensuring that value creation aligns with capture to achieve profitability. For instance, it highlights how inputs like resources and activities translate into outputs that meet demands while managing expenses. A key prerequisite for understanding business models is distinguishing them from business plans. While a business model focuses on the abstract logic of value creation, delivery, and capture, a business plan provides a detailed, operational document outlining specific goals, strategies, financial projections, and execution steps. The business model thus precedes and informs the , serving as its conceptual foundation rather than a tactical roadmap. The term "business model" was first popularized in the late 1990s amid the rise of digital and ventures, though its conceptual roots trace back to earlier economic theories such as transaction cost economics and the of the firm. This evolution reflects a shift toward integrating strategic and economic perspectives in analyzing firm performance.

Key Components

The key components of a business model are captured in the nine building blocks of the Business Model Canvas, a strategic framework developed by and Yves Pigneur to describe how an creates, delivers, and captures value. This canvas divides the model into customer-facing elements on the right side, infrastructure elements on the left, and financial aspects at the bottom, providing a visual template for mapping interdependencies. Customer Segments refer to the distinct groups of or organizations that a seeks to reach and serve, such as mass markets, niche markets, or segmented customer bases tailored by demographics, behaviors, or needs. Identifying these segments ensures that value creation efforts are directed toward specific audiences whose problems or desires the business addresses. Value Propositions encompass the bundle of products, services, and benefits that create value for a particular segment, solving customer pains, fulfilling jobs to be done, or providing gains through features like , , or customization. These propositions differentiate the offering from competitors and form the core of why customers choose the . Channels describe the various touchpoints through which a communicates with, reaches, and delivers value to its segments, including sales channels (e.g., direct sales or wholesalers), distribution channels (e.g., retail stores or platforms), and after-sales support. Effective channels integrate seamlessly to raise awareness, enable evaluation, purchase, delivery, and ongoing support. Customer Relationships outline the types of links a establishes with specific segments to acquire, retain, and grow them, ranging from personal assistance and dedicated support to automated services, communities, or models. These relationships determine long-term loyalty and can be for cost efficiency or personal for high-value interactions. Revenue Streams represent the cash flows generated from each customer segment based on how value is delivered, including sources like asset sales, usage fees, subscription fees, leasing, licensing, brokerage, or . mechanisms—such as fixed, dynamic, or —further shape these streams to align with customer . On the infrastructure side, Key Resources are the most essential assets required to make the business model function, categorized as physical (e.g., facilities), intellectual (e.g., patents), human (e.g., skilled staff), or financial (e.g., capital). These resources underpin value creation and delivery. Key Activities involve the critical tasks a company must perform to operate successfully, such as production, problem-solving, platform management, or supply chain coordination, directly supporting the value proposition. Key Partnerships comprise the network of suppliers, partners, and alliances that help optimize operations, reduce risks, or acquire resources, including strategic alliances, joint ventures, or supplier relationships to complement core competencies. Finally, Cost Structure captures all the costs incurred to operate the business model, divided into cost-driven (lean, focused on minimization) or value-driven (premium, focused on quality) approaches, with fixed and variable costs arising from resources, activities, and partnerships. These building blocks interconnect to form a cohesive : for instance, value propositions directly influence revenue streams by determining what customers are willing to pay, while simultaneously driving costs through the required resources and activities. The customer-oriented blocks (segments, propositions, channels, relationships, and revenues) rely on the efficiency of infrastructure blocks (resources, activities, partnerships, and costs) to deliver sustainable value. A core principle of this framework is holistic integration, where the blocks must align synergistically; misalignment in one—such as inadequate channels failing to reach targeted segments—can undermine the entire model, leading to inefficiencies or failure to capture value. This interconnected view emphasizes that business models succeed not in isolation but through balanced orchestration across all components.

Historical Development

Origins

The concept of the business model traces its early roots to foundational works in management and economic theory, where implicit frameworks for understanding how firms create and capture value emerged without the explicit terminology. In 1954, laid groundwork in The Practice of Management by emphasizing systematic management practices, including the analysis of objectives, , and as integral to organizational success, which implicitly shaped how businesses structured their operations and strategies. Similarly, industrial economics during this period, particularly the structure-conduct-performance paradigm developed by economists like Joe S. Bain, provided an implicit model for examining firm behavior through market structures, competitive conduct, and performance outcomes, influencing later explicit business model formulations. The 1960s and saw further conceptual development through transaction cost theory, which addressed the boundaries of firms and key operational decisions. Ronald Coase's 1937 paper "The Nature of the Firm" introduced the idea that firms exist to minimize transaction costs associated with market exchanges, laying the theoretical foundation for understanding make-or-buy decisions and the rationale for internalizing certain activities over . Oliver Williamson expanded this in the , particularly in his 1975 book Markets and Hierarchies: Analysis and Antitrust Implications, by detailing how structures—such as hierarchies versus markets—mitigate and in economic exchanges, thereby informing early notions of business model design around cost efficiency and firm boundaries. The first explicit use of the term "business model" in academic literature occurred in the late 1950s and early within contexts, marking a shift toward formalized discussions. In 1957, Richard Bellman and colleagues referenced it in a paper on constructing multi-stage, multi-person business games for and decision-making in Operations Research. This was followed in 1960 by Gardner M. Jones's article "Educators, Electrons, and " in The Accounting Review, where the term described computational models for and planning using early electronic tools. These early applications highlighted the term's initial association with analytical tools for simulating business operations, predating its broader adoption in .

Evolution in the 20th Century

In the , business model concepts advanced significantly due to and , reshaping industries like airlines and with an emphasis on cost leadership. The U.S. of 1978 spurred intensified competition in the , enabling low-cost carriers such as to adopt streamlined operations and cost-focused strategies that reduced fares and expanded market access. In , the 1982 antitrust breakup of and subsequent global deregulations opened markets to new entrants, fostering business models centered on operational efficiency, alliances, and cost leadership to compete in an increasingly internationalized sector. These developments, aligned with Michael Porter's 1980 framework of generic strategies, highlighted cost leadership as a core mechanism for gaining amid reduced regulatory barriers. A key evolution in 20th-century business practices was the transition from product-centric to service-oriented models, prominently illustrated by in the fast-food industry through expansion from the 1950s to the 1990s. Founded on the McDonald brothers' in the 1940s, the company shifted to widespread under starting in 1955, prioritizing standardized service delivery, rapid customer throughput, and scalable operations over standalone product manufacturing. By the 1980s and 1990s, this model had globalized, enabling to emphasize experiential service elements like consistency and to drive growth. This approach exemplified broader servitization trends, where firms integrated services to enhance value beyond physical goods. The 1990s marked the popularization of business models amid the dot-com boom, fueled by technological innovations like the . Tim Berners-Lee's development of the WWW in 1989, released publicly in 1991, provided the infrastructure for and digital platforms, inspiring novel online business models that prioritized network effects, scalability, and during the late-1990s surge. This era's explosive growth in internet startups highlighted the need for clear business model articulation, as reflected in Joan Magretta's 2002 Harvard Business Review article, which synthesized lessons from dot-com experiences to define business models as customer-centric profit mechanisms distinct from strategy.

Modern Developments

The advent of widespread and in the 2000s and 2010s profoundly reshaped business models by enabling scalable and user-centric streams. Subscription-based models emerged as a dominant paradigm, exemplified by Netflix's transition from DVD rentals to streaming services in 2007, which allowed unlimited access to content for a flat monthly fee, disrupting traditional media ownership models and fostering through personalization algorithms. Similarly, Spotify's 2008 launch of a model—offering ad-supported free access alongside premium ad-free subscriptions—capitalized on mobile apps to democratize music streaming, growing from 1 million paying subscribers in 2011 to over 5 million by 2012, while converting approximately 39% of free users to paid by the early . These innovations, supported by proliferation and adoption, shifted industries from one-time sales to recurring , enhancing but challenging content creators with royalty dependencies. In the 2020s, business models increasingly integrated (AI), , and environmental, social, and governance (ESG) factors to address and transparency demands. AI has optimized resource use in frameworks, such as H&M's demand forecasting tools that reduced textile waste by predicting consumer needs, while enables traceability, as seen in Carrefour's system that cut food waste by 20% and tracking time by 90%. ESG integration evolved into "ESG 2.0," embedding measurable into core operations, with companies like Unilever's Sustainable Living Plan minimizing waste through circular practices and AI-driven analytics for resilience. These technologies facilitate deeper business transformations, prioritizing long-term viability over short-term gains, amid regulatory pressures like the EU's Corporate Sustainability Reporting Directive. The from 2020 onward uniquely accelerated the adoption of hybrid business models that blend digital and physical elements, responding to lockdowns and remote demands. This "great acceleration" propelled digitalization, with firms like shifting 90% of its workforce to remote operations while retaining physical hubs for collaboration, resulting in permanent reductions in office space and enhanced integration. Small and medium enterprises pursued digital-physical hybrids, such as retail combining online ordering with in-store fulfillment, to mitigate disruptions and boost resilience. By 2021, up to 25% more workers engaged in remote or hybrid setups than pre-pandemic estimates, fundamentally altering operational paradigms across sectors.

Theoretical Foundations

Design Logic

The design logic of a business model constitutes the foundational rationale that integrates its components into a cohesive architecture, ensuring that value creation, delivery, and capture mechanisms align to achieve sustainable . This logic emerges from managerial reasoning processes that evaluate how individual elements—such as value propositions, relationships, and streams—interact to form a unified , rather than operating in isolation. Seminal work in this area posits that effective design logic arises from cognitive foundations where managers assess exogenous changes, like technological disruptions, to reconfigure business model elements accordingly. A key aspect of design logic is coherence, wherein the business model functions as a compelling "story" that links value creation directly to needs and experiences. This approach emphasizes a logical flow that makes the model's assumptions intuitive and verifiable, facilitating communication among stakeholders and enabling iterative refinement. For instance, Osterwalder's framework highlights how the Business Model Canvas illustrates this flow by mapping interdependent blocks to narrate how a firm intends to generate value, underscoring the importance of in aligning internal operations with external market demands. Systemic design further reinforces this logic by applying principles from to address interdependencies among business model components, preventing silos that could undermine overall efficacy. In this view, a business model is conceptualized as an activity system where activities, participants, and linkages form a holistic network that transcends traditional firm boundaries to optimize value flows. This perspective draws on general to stress that changes in one component, such as altering a , must propagate coherently across the system to maintain equilibrium and adaptability. Central to design logic is the concept of rationale-building, which explicates why components fit together through explicit testing of underlying assumptions about markets, technologies, and behaviors. This involves scrutinizing propositions—such as or partner reliability—to validate the model's viability before implementation, often using methods that iterate between conceptualization and empirical feedback. Osterwalder's , for example, treats the business model as a design artifact whose logic is rigorously tested to ensure conceptual integrity and practical utility.

Empirical Insights

Empirical research underscores the critical role of complementarities in partnerships for enhancing business model viability, particularly through alliances that integrate s and foster resource sharing. Studies on integrations reveal that knowledge complementarities between partners significantly boost knowledge exchange, which in turn improves overall performance by enabling better coordination and . For example, an of 70 matched buyer-supplier pairs in the automobile and telecommunication sectors demonstrated that such complementarities positively influence inter-firm trust and systems integration, leading to measurable gains in . Similarly, research on internal and external highlights interactional effects where aligned partnerships amplify outcomes, with fit between collaborative practices explaining variations in performance metrics like delivery reliability and . Performance correlations between business model fit and firm success have been robustly established through meta-analyses, linking well-designed models to superior financial and operational results. A comprehensive of 77 studies encompassing 26,050 firms found a positive corrected of 0.25 between business model and firm , indicating that models aligned with environmental and strategic contexts drive sustained competitive advantages. This relationship is moderated by factors such as industry dynamism and firm age, where better fit amplifies outcomes; for instance, in stable macro-environments, the BMI-performance link strengthens, emphasizing the need for adaptive partnering. Additional syntheses, drawing from journals like the Journal of Management Studies, confirm that business model innovations, when complemented by strong alliances, contribute to value creation across diverse sectors. A more recent of 147 studies covering 336,198 firms reported a similar positive of 0.24, reinforcing these findings while highlighting institutional contingencies as moderators. Empirical studies confirm a significant relationship between strategic objectives and business models. Strategic objectives define an organization's long-term goals, direction, and competitive positioning, while the business model outlines how the organization creates, delivers, and captures value to achieve those objectives. The business model operationalizes strategy, converting strategic intent into economic value and revenue generation. Alignment between them is essential: strategy typically sets the course and objectives first, with the business model designed or adapted to support and execute them effectively. Empirical research indicates that distinct strategies influence unique business models, particularly through strategic actions. This complements the established findings on alignment and performance correlations by underscoring how strategic choices shape business model design and contribute to firm outcomes. Studies from the further illuminate the risks of misalignment, showing that 60% or higher failure rates in strategic alliances—key to many models—are common, with nearly half of companies reporting such levels due to poor partner selection and compatibility. A CMO Council survey of leaders attributed these failures largely to inadequate strategies for identifying and qualifying partners, underscoring how misaligned objectives and capabilities undermine model viability. This high incidence highlights the empirical imperative for rigorous partner to mitigate risks and enhance long-term .

Business Model Design

Economic Aspects

The economic viability of a business model hinges on its ability to generate that exceeds costs, ensuring profitability and sustainability. outline the mechanisms through which a captures income from its , with common types including transactional, subscription, and licensing approaches. In a transactional revenue model, income is derived from one-time payments for goods or services, such as per-unit sales in retail, where equals the number of units sold multiplied by the per unit. The subscription model generates recurring through periodic fees for ongoing access, as seen in software-as-a-service platforms, providing predictable flows but requiring continuous value delivery to retain customers. Licensing models allow third parties to use for a fee, often as a percentage of sales or a flat rate, enabling scalability without direct production involvement. To assess viability, businesses employ break-even analysis, which determines the sales volume needed to cover costs; the formula is: Break-even Point (units)=Fixed CostsPrice per Unit−Variable Cost per Unit\text{Break-even Point (units)} = \frac{\text{Fixed Costs}}{\text{Price per Unit} - \text{Variable Cost per Unit}} This calculation highlights the threshold where total revenue equals total costs, guiding pricing and volume decisions. Cost structures form the foundation of economic analysis in business models, comprising fixed and variable costs that influence overall expenses and scalability. Fixed costs remain constant regardless of output, such as rent or salaries, providing stability but posing risks during low production periods. In contrast, variable costs fluctuate with production volume, including materials and labor directly tied to units produced, allowing flexibility but increasing per-unit expenses at low scales. The total cost equation integrates these elements as: Total Cost=Fixed Costs+(Variable Cost per Unit×Units Produced)\text{Total Cost} = \text{Fixed Costs} + (\text{Variable Cost per Unit} \times \text{Units Produced}) This formula enables forecasting and optimization, revealing how output levels affect profitability. Economies of scale further enhance cost structures by reducing average costs per unit as production increases, often through bulk purchasing or operational efficiencies, which is particularly beneficial for high-fixed-cost industries like manufacturing. Value capture in business models focuses on extracting economic returns aligned with the perceived benefits delivered to customers, primarily through pricing strategies. Value-based pricing sets prices according to the customer's assessment of a product's worth, rather than production costs, allowing premiums for differentiated offerings like luxury brands where perceived value exceeds tangible inputs. This approach contrasts with cost-plus methods by emphasizing customer , informed by factors such as brand strength and utility, thereby maximizing revenue while sustaining long-term relationships. Effective value capture requires balancing perceived value with competitive dynamics to avoid under- or over-pricing, ensuring the business model aligns economic incentives with market realities.

Strategic Considerations

Strategic objectives define an organization's long-term goals, direction, and competitive positioning, while the business model outlines how the organization creates, delivers, and captures value to achieve those objectives. The business model operationalizes the strategy, converting strategic intent into economic value and revenue generation. Alignment between strategic objectives and the business model is essential: strategy typically sets the course and objectives first, with the business model designed or adapted to support and execute them effectively. Empirical studies confirm a significant relationship between strategy and business models, where distinct strategies influence unique business models, particularly through strategic actions. Business models must align closely with a firm's competitive to ensure long-term viability and superior performance. Michael Porter's generic strategies—cost leadership, differentiation, and focus—offer a foundational framework for this integration, where the business model operationalizes these approaches by defining how value is created, delivered, and captured in ways that support the chosen . For example, under cost leadership, the business model emphasizes streamlined operations and to minimize costs while maintaining acceptable quality, as seen in retailers like that leverage efficient supply chains. In contrast, a differentiation incorporates unique value propositions, such as innovative features or prestige, into the model to justify , exemplified by Apple's of integrated hardware and services. Focus strategies narrow the model to serve specific market segments, tailoring offerings to niche needs for deeper penetration and loyalty. This alignment prevents strategic inconsistencies, such as pursuing low costs while overinvesting in non-essential features, thereby enhancing overall competitiveness. Evaluating the outcomes of business models requires key performance indicators (KPIs) that track long-term value generation and strategic effectiveness. One critical KPI is (CLV), which quantifies the net profit a firm expects from a over the entire relationship duration. The basic formula for CLV is: CLV=(Average Purchase Value×Purchase Frequency×Customer Lifespan)−Customer Acquisition CostCLV = (Average\ Purchase\ Value \times Purchase\ Frequency \times Customer\ Lifespan) - Customer\ Acquisition\ Cost This metric helps assess whether acquisition and retention efforts yield sufficient returns, guiding in and operations. For instance, subscription-based models like use CLV to optimize content s, ensuring that high-value customers subsidize growth. Other complementary KPIs, such as retention rate and , provide a holistic view of model performance, revealing how well the strategy translates into sustained streams. Beyond alignment and measurement, business models function as strategic assets that drive , particularly through that enables efficient expansion. A well-designed model creates barriers to imitation by combining unique resources and processes, allowing firms to grow faster than costs—such as through digital platforms that reach global audiences with minimal incremental . This transforms the model into a , as in Amazon's ecosystem, where network effects amplify value capture over time. Ultimately, viewing the business model as a strategic asset encourages ongoing refinement to adapt to market dynamics while preserving differentiation from rivals.

Component Analysis

Component analysis involves evaluating the individual elements of a business model—such as value propositions, key resources, channels, customer relationships, revenue streams, key activities, key partnerships, and cost structure—to identify their inherent strengths, weaknesses, and potential for refinement. This process enables designers to pinpoint vulnerabilities within specific components and enhance overall model resilience. For instance, assessing key partnerships through a SWOT framework can reveal risks associated with dependency on external collaborators, such as disruptions or opportunistic behavior by partners. One established technique for this evaluation is the integration of with business model components, where strengths and weaknesses are mapped to internal elements like key resources and activities, while opportunities and threats address external factors influencing channels and customer segments. This approach, applied in case studies of firms reconstructing their models, facilitates targeted adjustments, such as bolstering cost structures to mitigate threats from market volatility. By systematically analyzing each component, organizations can uncover misalignments that undermine viability. Optimization in component analysis requires balancing trade-offs inherent to business model design, such as the tension between resource intensity—which supports robust key activities—and operational agility that preserves flexibility in customer relationships. A unique tool for achieving this balance is component dependency mapping, which visualizes interrelations among elements to reveal how changes in one, like revenue streams, propagate effects across others, such as or . This mapping promotes informed adjustments, reducing cognitive biases and enhancing adaptability by highlighting unilateral influences, for example, how value capturing strongly impacts financial models without reciprocal effects. Research underscores the perils of over-reliance on a single component; for example, excessive dependence on supply chain partners in key partnerships can lead to exploitation, eroding firm performance through reduced and heightened vulnerability to partner actions. Such imbalances amplify failure risks, as unconscious changes in interconnected components propagate weaknesses across the model. The key components, including those from established frameworks like the Business Model Canvas, provide the baseline for these evaluations. Empirical studies on interrelations further indicate that neglecting these dependencies correlates with suboptimal outcomes, emphasizing the need for holistic optimization to sustain .

Categorization and Types

Traditional Models

Traditional business models, often referred to as the "" or model, represent a linear approach to value creation where companies control a sequential flow of activities from production to consumption. In this model, value is generated through a straightforward , with inputs transformed into outputs in a unidirectional manner, emphasizing in internal operations rather than external interactions. The pipes model structures the business as a series of connected stages, akin to a , where raw materials or ideas enter at one end and emerge as finished products or services at the other. A seminal example is Henry Ford's implementation of the moving assembly line in 1913 at the Highland Park plant, which revolutionized by standardizing production processes to assemble Model T automobiles in a linear sequence of tasks, drastically reducing costs and time from over 12 hours to about 90 minutes per vehicle. This approach exemplified the model's focus on optimizing internal efficiencies to deliver value downstream to consumers. Key types of traditional models include brick-and-mortar retail and (B2B) supply chains. In brick-and-mortar retail, companies operate physical stores as the endpoint of a linear distribution chain, procuring goods from suppliers, managing inventory in warehouses, and selling directly to customers through in-person transactions, as seen in early 20th-century department stores like . B2B supply chains, meanwhile, involve sequential exchanges between firms, such as automotive parts manufacturers supplying components to assemblers in a controlled, one-to-one flow without intermediary marketplaces. A foundational framework for analyzing these models is Michael Porter's value chain analysis, introduced in his 1985 book , which dissects firm activities into primary (e.g., inbound , operations, outbound , , service) and support categories (e.g., , technology development, , firm infrastructure) to identify sources of within the linear structure. Characteristics of traditional models center on of assets, of physical , and one-way transactions. Firms typically own their supply chains, holding to buffer against demand fluctuations and ensure steady production, which incurs costs but allows tight control over quality and branding. Transactions are unidirectional, with value flowing from producer to consumer without reciprocal producer-consumer interactions, prioritizing scale through or specialization in specific chain segments. These models dominated pre-digital industries, serving as the baseline for operations before the of networked alternatives.

Platform Models

Platform business models, also known as multi-sided platforms, operate by facilitating direct interactions between two or more distinct groups of users, thereby creating value through the of these exchanges rather than producing goods or services themselves. These platforms thrive on cross-side network effects, where the utility for participants on one side increases as more users join the opposite side, fostering a virtuous cycle of growth. A foundational concept in understanding this dynamic is , which posits that the value of a network grows proportionally to the square of the number of connected users, expressed as: Network Value∝n2\text{Network Value} \propto n^2 where nn represents the number of users. This quadratic scaling underscores how platforms can achieve exponential value creation as user bases expand, distinguishing them from traditional linear models. Illustrative examples include , which connects drivers with passengers to enable on-demand ride-sharing, and , which matches property hosts with travelers seeking short-term accommodations. Both exemplify how platforms leverage technology to reduce transaction costs and scale interactions globally. However, launching such platforms faces the chicken-and-egg problem: attracting users on one side requires a on the other to generate meaningful value, creating a dilemma. To overcome this, platforms deploy subsidy strategies, such as waiving fees or providing incentives to the more elastic side (often consumers) to build initial participation and trigger network effects. These tactics, informed by economic models of in two-sided markets, help balance demand across sides and maximize overall platform welfare. Additionally, effective governance rules are essential, encompassing policies for user verification, , and quality controls to maintain trust and prevent negative externalities like or low-quality service. Such mechanisms ensure sustainable interactions and platform stability.

Other Categories

Servitization represents a strategic shift in business models where manufacturers transition from selling physical products to offering integrated product-service systems, emphasizing ongoing service delivery to enhance value and generate recurring revenue. This approach, often termed product-service systems (PSS), allows firms to deepen relationships and differentiate through performance-based contracts rather than one-time . A seminal example is Rolls-Royce's "Power by the Hour" initiative, introduced in the 1960s and refined over decades, under which airlines pay a per operating hour, covering , repairs, and overhauls, thereby transferring operational risks to the manufacturer and ensuring predictable income streams for Rolls-Royce. Empirical studies highlight that servitization can improve firm by fostering and lock-in, though it requires significant investments in and capabilities to manage service complexity. Subscription models extend this service-oriented logic by providing customers with continuous access to products or services for a recurring fee, creating stable and aligning provider incentives with long-term . In software-as-a-service (SaaS) contexts, this model decouples ownership from usage, enabling scalability and frequent updates; Adobe's 2012 pivot to Creative Cloud subscriptions, for instance, transformed its from perpetual licenses to about 74% recurring by 2015, boosting through cloud-based access and reducing . Ecosystem models build on subscriptions by integrating complementary offerings into a networked value system, where core products facilitate ancillary services or add-ons. A distinctive variant is the razor-and-blades model, where the durable base product (e.g., printers or razors) is sold at low or negative margins to drive high-margin sales of consumables (e.g., ink cartridges or blades), as pioneered by in the early and analyzed in economic for its role in installed-base economics. This structure incentivizes customer acquisition through the "razor" while profiting from repeat "blade" purchases, though antitrust scrutiny arises when tying limits competition. Sustainability-focused business models, particularly approaches, prioritize resource efficiency and minimization by designing closed-loop systems that extend product lifecycles through , , and , addressing escalating environmental, social, and governance (ESG) imperatives in the . These models challenge linear "take-make-dispose" paradigms by internalizing end-of-life costs and creating value from secondary materials, with firms like Interface achieving cost savings via carpet tile leasing and programs that have reduced to by 91%. Research underscores their alignment with ESG trends, as circular practices enhance environmental scores by reducing emissions—potentially cutting global CO2 by 39% by 2050—while improving social governance through ethical supply chains. Barriers include upfront capital for redesign, but adoption is accelerating amid regulatory pressures like the EU's (updated in 2020 and with ongoing consultations as of 2025), enabling firms to meet stakeholder demands for transparency and long-term viability.

Applications and Examples

Industry Applications

In the technology industry, business models increasingly emphasize agility and data-driven decision-making to accelerate innovation and . Agile methodologies enable rapid and cross-functional , allowing tech firms to respond swiftly to market changes by integrating (SaaS) platforms that fulfill up to 90% of operational needs through subscriptions, reducing development time and infrastructure overhead. Data-driven approaches, such as product-led growth (PLG) in SaaS models, leverage for user segmentation and lead scoring, fostering self-serve and viral expansion while achieving ten percentage points higher annual recurring growth than high-performing sales-led models. Manufacturing sectors adapt business models around lean principles and just-in-time () inventory to minimize waste and enhance efficiency, with systems optimizing supply chains by synchronizing production closely with demand to reduce holding costs. In the automotive subsector, a notable shift occurred post-2020 toward (EV) models, driven by regulatory pressures and consumer demand, prompting adaptations like new lifecycle income streams, such as revenues from customer and vehicle data and on-demand features like software updates, generating approximately €50 per vehicle annually and offsetting high upfront costs. Healthcare and industries prioritize regulatory-compliant business models to navigate stringent oversight while expanding access and . In healthcare, telemedicine platforms have evolved into hybrid models combining virtual consultations with remote monitoring, supported by expanded reimbursement codes from bodies like the (CMS), enabling scalable services for chronic care and urgent visits amid post-COVID regulatory flexibilities. These models address compliance challenges such as patient privacy under HIPAA by incorporating secure digital tools, though uncertainties in long-term reimbursement parity persist. In , entities adopt licensing-specific structures, such as digital banking licenses in regions like and , which mandate robust and e-KYC protocols to ensure compliance while offering full-spectrum services like lending and payments, as seen in rapid customer growth for providers like . Regional variations, including EU passporting for cross-border approvals, further shape these models to balance innovation with regulatory scrutiny.

Case Studies

Amazon's business model exemplifies successful evolution from a niche online bookseller to a comprehensive integrating , , streaming, and . Founded in 1994 by in his garage, the company initially focused on selling books online, capitalizing on the internet's potential to offer vast selection and convenience over traditional brick-and-mortar stores. By 1997, Amazon had gone public and expanded beyond books to include music, videos, and other consumer goods, leveraging its platform to attract third-party sellers through the program launched in 2000, which allowed external vendors to list products and share infrastructure. This shift marked the beginning of its approach, where interconnected services reinforced customer loyalty; for instance, Prime membership, introduced in 2005, bundled fast shipping, video streaming, and other perks, growing to over 200 million subscribers by 2023 and driving recurring revenue. Key to this success was a customer-centric strategy that prioritized long-term growth over short-term profits, with innovations like AWS () launched in 2006 transforming excess computing capacity into a dominant cloud provider, contributing over 15% of total revenue by 2022. By tightly integrating these elements—retail, subscriptions, , and —Amazon created a flywheel effect, where increased usage improved recommendations and efficiencies, solidifying its market dominance with net sales exceeding $574 billion in 2023. In contrast, Kodak's failure highlights the perils of resisting a digital business model shift, despite early innovations in the technology. Kodak invented the first in 1975, but senior management dismissed it as a threat to its profitable -based model, suppressing further development for years. Internal studies in 1981 accurately predicted that would replace within a decade, yet the company continued investing heavily in analog enhancements, such as the $500 million Advantix system in 1996, which failed commercially. This resistance stemmed from a core business model reliant on razor-and-blade economics—low-cost cameras paired with high-margin and processing—making digital capture, which eliminated consumables, an existential threat. Kodak missed opportunities to lead in digital ecosystems, including photo-sharing platforms; despite recognizing the potential of in the 1990s, it failed to connect its technologies to emerging online networks like those that powered or , allowing competitors such as and to capture the market. By 2012, Kodak filed for , its in plummeting from near-monopoly in to irrelevance in digital, with dropping approximately 74% from about $14.5 billion in 1997 to $3.8 billion in 2012. The rivalry between Blockbuster and provides a stark case of loss due to delayed adaptation to subscription-based digital models. In 2000, Blockbuster operated approximately 9,000 stores worldwide, dominating video rentals with a late-fee-driven that accounted for up to 40% of its income, while , a nascent service, offered an acquisition for $50 million, which Blockbuster declined. 's no-late-fee subscription disrupted the industry, growing subscribers from 300,000 in 2000 to over 20 million by 2010 through and . Blockbuster's store network, once a strength, became a liability as digital preferences rose; it peaked at over 9,000 locations in 2004 but closed more than 1,000 stores by 2008 amid rising competition. By 2010, when Blockbuster filed for , it had shrunk to about 3,300 U.S. stores, with declining 75% from 2003 to 2005 alone, while 's valuation grew significantly, reaching approximately $9 billion by the end of 2010. This decline culminated in the closure of all corporate-owned stores by 2014, illustrating how clinging to physical retail eroded Blockbuster's position against agile digital entrants.

Frameworks and Tools

Common Frameworks

One of the most widely adopted frameworks for conceptualizing business models is the Business Model Canvas, a visual template that outlines a business on a single page through nine interconnected building blocks. To visualize a plan, it breaks the plan into these blocks, typically starting with the value proposition, followed by customer segments, key resources, channels, and financial aspects (revenue streams and cost structure); the visual layout illustrates relationships between elements, facilitating iteration and adaptation not only for businesses but also for personal projects, goals, and strategies. Developed by , this tool facilitates the description, design, and analysis of business models by focusing on how organizations create, deliver, and capture value. The nine blocks are grouped into three core areas: the right side addresses customer-facing elements (desirability), the left side covers internal operations (feasibility), and the bottom handles financial aspects (viability). The building blocks include:
  • Customer Segments: Defines distinct groups of people or organizations the business aims to serve, such as mass market or niche segments.
  • Value Propositions: Describes the bundle of products and services that create value for specific customer segments, addressing their needs through pain relievers or gain creators.
  • Channels: Outlines how value propositions are communicated and delivered to customers, encompassing awareness, evaluation, purchase, delivery, and after-sales stages.
  • Customer Relationships: Details the types of interactions established with customer segments to acquire, retain, and grow them, ranging from personal assistance to automated services.
  • Revenue Streams: Represents the cash generated from customer segments, including sources like asset sales, usage fees, or subscriptions.
  • Key Resources: Identifies the essential assets required to make the business model work, such as physical, intellectual, human, or financial resources.
  • Key Activities: Specifies the most important actions needed to operate the model, like production or problem-solving.
  • Key Partners: Describes the network of suppliers and partners that help optimize operations, reduce risks, or acquire resources.
  • Cost Structure: Captures all costs incurred to operate the business model, distinguishing between cost-driven and value-driven approaches.
This framework was popularized in the 2010 book Business Model Generation by and Yves Pigneur, which provides practical guidance for visionaries and executives to innovate and refine business models through and prototyping. The book emphasizes collaborative workshops and iteration, making it a foundational resource for across industries. A notable variation of the Business Model Canvas is the Lean Canvas, adapted by Ash Maurya for lean startups to prioritize problem-solution fit over traditional value propositions. Introduced in Maurya's 2012 book Running Lean: Iterate from Plan A to a Plan That Works, it replaces blocks like customer relationships with problem, solution, key metrics, and unfair advantage to focus on validated learning and risk prioritization. This adaptation shifts emphasis toward early-stage experimentation, making it particularly useful for entrepreneurs testing assumptions in uncertain environments. Another analytical framework is the RCOV model, which structures business models around resources and competences, (encompassing offerings and costs), and value (including perceived customer value and prices). Proposed by Benoît Demil and Xavier Lecocq in their 2010 paper, this approach views business models as dynamic configurations that evolve through interdependent choices to ensure consistency and profitability. The RCOV framework is particularly valuable for analyzing how internal resources align with external value creation, enabling firms to adapt to environmental changes without disrupting core coherence.

Design Methodologies

Design methodologies for business models emphasize structured, iterative approaches to create, refine, and validate models that align with market needs and organizational capabilities. These processes draw from principles, adapted to the strategic context of value creation, delivery, and capture. A prominent example is the iterative cycle proposed by , which integrates phases of empathizing with stakeholders, defining core problems, ideating potential solutions, prototyping model elements, and testing assumptions through real-world feedback. This methodology encourages teams to visualize and iterate on business models using tools like the Business Model Canvas, fostering innovation while minimizing risks associated with untested ideas. Central to these methodologies is the loop of ideation, prototyping, and testing, which allows for rapid refinement based on . Ideation involves brainstorming diverse model configurations to explore opportunities, often starting with customer pain points and value propositions. Prototyping then translates these ideas into tangible sketches or simulations, such as mapping revenue streams and key partnerships on a . Testing follows by exposing prototypes to validation, adjusting based on outcomes to ensure viability. This cycle is non-linear, with feedback loops enabling continuous improvement, as seen in Osterwalder's approach where multiple iterations help identify robust models resilient to market changes. Supporting tools enhance this process by providing structured ways to gather insights and anticipate uncertainties. , for instance, involves developing multiple future narratives to stress-test business models against variables like technological shifts or economic fluctuations, helping designers evaluate adaptability. Customer discovery interviews, rooted in practices, complement this by conducting targeted conversations with potential users to uncover unmet needs and validate assumptions early, ensuring models are customer-centric. A key emphasis in modern design methodologies is experimentation, particularly through the integration of Minimum Viable Products (MVPs). An MVP represents the simplest version of a product or service that embodies core model elements, allowing teams to test hypotheses about demand and potential with minimal resources. This approach, popularized by , facilitates validated learning by measuring real user interactions and iterating accordingly, thereby reducing the time and cost of flawed model deployment. For example, companies like used an MVP video to gauge interest before full development, confirming key business model assumptions around user acquisition and .

Innovation and Adaptation

Business Model Innovation

Business model innovation involves the creation of novel approaches to value creation, delivery, and capture, often driven by external pressures such as technological advancements and unmet market needs. Technological disruptions, including the rise of digital platforms and , compel firms to rethink traditional structures to remain competitive, as new technologies enable entirely new ways to design and scale business models. Similarly, identifying market gaps—such as underserved customer segments or inefficiencies in existing value chains—prompts by allowing companies to address demands that incumbents overlook. One prominent type of is the , which focuses on creating uncontested market spaces through simultaneous differentiation and cost reduction, thereby generating new demand rather than competing in saturated "red oceans." A key process underlying business model innovation is theory, developed by , which explains how simpler, more affordable solutions initially target low-end market footholds or new segments before ascending to challenge established players. In this framework, disruptors succeed by prioritizing accessibility and convenience over high performance, gradually improving to capture mainstream customers as incumbents struggle to adapt due to their focus on profitable, high-margin segments. This theory highlights the iterative nature of innovation, where business models evolve through experimentation and refinement to exploit overlooked opportunities. Examples include personal computers disrupting mainframes by starting in niche home-use applications. In the 2020s, (AI) has emerged as a major driver of business model innovation, enabling firms to automate processes, personalize offerings, and create data-driven revenue streams. According to the 2025 AI Index Report, 78% of organizations reported using AI in 2024, up from 55% the previous year, with many experimenting to transform core operations and models. This trend underscores AI's role in accelerating innovation, as companies leverage for and , though success depends on integrating it with strategic goals.

Adaptation Strategies

Business model adaptation strategies enable firms to evolve their existing , , and value delivery mechanisms in response to dynamic external pressures, ensuring sustained viability without necessitating complete reinvention. These strategies emphasize reactive adjustments to maintain competitive positioning, often triggered by identifiable environmental shifts. Key triggers for adaptation include regulatory changes, intensified competition, and market disruptions such as technological advancements or economic downturns. For instance, new regulations like the European Union's (GDPR) have compelled digital platforms to adapt their data monetization models to comply with privacy standards while preserving user trust and revenue streams. Similarly, competitive threats from agile entrants force incumbents to refine their value propositions; a study of incumbent firms in the energy sector found that policy-induced competition prompted shifts toward sustainable business models. In response to such triggers, firms often employ pivoting strategies, which involve targeted modifications to core elements like segments or without overhauling the entire model. A prominent example is Twitter's 2023 rebrand to X, where the platform pivoted from a primarily advertising-driven model to an "everything app" encompassing payments, video, and e-commerce to counter declining ad revenues and regulatory scrutiny on . Organizational provides a foundational approach to by simultaneously exploiting current business models for efficiency while potential evolutions to address emerging challenges. This balance mitigates the risks of over-reliance on established practices, as exploitation focuses on optimizing existing operations—such as cost reductions and incremental improvements—while involves testing alternative configurations like new partnerships or digital integrations. on high-tech firms demonstrates that ambidextrous firms achieve higher performance during market , as they allocate resources dynamically between short-term stability and long-term adaptability. Structural separation, such as dedicated teams for exploratory projects, further enables this duality, allowing firms to integrate insights from efforts back into core operations. To measure the effectiveness of adaptation, firms utilize resilience metrics that quantify a model's robustness against disruptions, including recovery time, financial buffer ratios, and adaptability indices derived from stress testing. These metrics often incorporate scenario-based planning, where organizations simulate multiple future states—such as regulatory overhauls or supply chain failures—to evaluate and refine model components proactively. For example, scenario planning involves developing 3-5 plausible narratives based on key uncertainties, then assessing impacts on revenue and costs; a framework recommends tracking trigger points, like a 20% drop in , to activate predefined adaptation responses. This approach, validated in sectors like and , ensures adaptations are not but aligned with measurable outcomes for long-term .

Overlapping Ideas

The concept, introduced by in 1985, delineates the sequence of operational activities within a firm that contribute to value creation and , serving as a core subset of the broader business model by focusing on internal processes such as inbound , operations, and . This operational framework integrates into the business model to analyze how resources are transformed into customer value, but it does not encompass the full scope of strategic positioning or value capture mechanisms. A functions as a specific component within the business model, outlining the mechanisms for generating from value propositions, such as pricing strategies and channels, rather than representing the entirety of how a firm operates and competes. In frameworks like the Business Model Canvas, revenue streams form one of nine building blocks, emphasizing their role in sustaining the overall model without substituting for elements like customer relationships or key resources. Business models intersect with open innovation approaches, where organizations adapt their structures to incorporate external knowledge and ideas into internal value creation, enabling more efficient commercialization of innovations beyond closed boundaries. Henry Chesbrough's 2003 framework highlights this overlap, positing that effective necessitates redesigned business models to facilitate inflows and outflows of ideas, technologies, and pathways to market.

Key Distinctions

A business model delineates the fundamental logic of how a firm creates, delivers, and captures value, focusing on the architecture of these mechanisms, whereas a business encompasses the contingent choices about which markets to target, competitive positioning, and to achieve superior performance. This distinction arises because involves broader, often unobservable plans for adapting to contingencies like market shifts, while the business model represents the observable, realized structure resulting from those strategic decisions. For instance, might dictate entering the market to target environmentally conscious consumers, but the business model specifies the subscription-based revenue streams and sales channels to enable that entry. In contrast to the , which details the , processes, and resource deployment required for execution, the business model operates at a higher level of , outlining the overall value logic without prescribing day-to-day operations. The translates the business model's intent into actionable capabilities, such as standardized processes for integration or decentralized decision-making for , ensuring alignment with strategic goals. This separation allows firms to refine independently of core value propositions; for example, a subscription-based software business model might pair with an emphasizing for . The business model serves as a static snapshot of an organization's value creation framework at a given point, whereas represents a dynamic, ongoing process of integrating technologies to fundamentally alter operations, interactions, and potentially the model itself. Unlike the relatively fixed portrayal of streams and structures in a business model, demands continuous adaptation, such as leveraging AI for personalized services, which can evolve the underlying model over time. This boundary highlights how business models provide a foundational blueprint, while transformation initiatives drive iterative changes to sustain relevance in technology-disrupted environments.

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