Topic Overview – Business Models For Technology & Finance Measurement
Learning Outcome:
LO.1 explain the theory and practice of businesses (COI, CID, SID)
LO.2 describe a range of current problems and changes that organizations face in being successful (COI,
CID, IC, SID).
LO.3 critically evaluate research and theory to support decision-making and explain progress (COI, CID,
SID).
LO.4 analyse complex issues, make reasoned judgments with incomplete data, and communicate
conclusions clearly to specialist and non-specialist audiences (COI).
LO.5 students will discuss good practice for organization success (COI, CID, SID).
LO.6 undertake a critical audit of skills and capabilities for a professional career and identify areas
required for improvement (COI, CID, EID).
1. The Role ofthe Business Model
According to Chesbrough, Ahern, Finn, & Guerraz (2006), others have observed that the successful
penetration of developing country markets with new technologies requires a business model. Emerson
describes the need for a "blended value proposition’’ and Dees similarly describes the business value
chain that must be created in order to sell effectively in developing countries."Allen, Hammond and
Prahalad (2004) go further, advising companies in advanced economies to take a clean sheet of paper in
the design of the business. They provide some tactical advice on how to reach these consumers: "To
reach them, CEOs must shed old concepts of marketing, distribution, and research." They specificaiiy call
attention to the need for new approaches in areas such as Business Models that shed traditional
business models developed with wealthy consumers in mind, innovative Research and Development that
deals with a successful product development which requires a deep understanding of local
circumstances, so that critical features and functionality can be incorporated into the product's design and
finally, modernizing distribution channels.
Another approach has been to seek to better define the concept of the business model, by combining the
theoretical traditions of the strategic management literature with other relevant theories of innovation and
the firm. For instance Amit and Zott (2001) in their seminal paper on value creation in e-businesses, have
used the theoretical foundations of strategic management literature and other theoretical work, to
formulate and empirically test a business model of value creation for e-businesses. They have turned to
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value chain analysis, Schumpeterian innovation, the resource based view of the firm, strategic network
theory and transaction cost economics to provide the basis of an integrated model of value creation in the
firm. They draw on aspects of the various theories of particular importance to e-commerce, such as from
value chain analysis, the identification of the primary activities of the firm that deliver value, from
Schumpeterian innovation, the generation of rents following technological change, from the resource
based view of the firm, value creation from a unique bundle of resources and capabilities, from strategic
networks, value created by cospecialisation of assets and finally from transaction cost economics, the
need for transaction efficiency. Amit and Zott (2001) suggest that no framework ‘should be given priority
over the others when examining the value creation potential of e- businesses’ and that there is a strong
interdependence between the various sources of value (p509). Hedman and Kalling (2002) adopt a
similar approach in developing a business model for IT businesses. The theoretical antecedents of their
business model are organisation theory including transaction cost economics, strategy theory, Porter’s
framework, the resource based view and the strategy process perspective. The components of their
business model consist of a description of the: • industry, customers and competitors, • product offering, •
activities and organisation, • resources and competencies, • factor markets and suppliers. Each of the
components is substantially informed by the concepts provided by the theoretical antecedents to the
business model concept. For instance the concept of bundling complementary assets is important in
defining the product offering. The concept of the value chain is important in describing the organisation of
business activities and the resource view of the firm is fundamental to defining resources and
competencies of the firm. Developing a generalisable business model is a challenge. To date most other
academic formulations of the business model focus on taxonomic issues in defining the relevant
components of the model but offering little by way of empirical support for their propositions or suggested
causation between the components. Some business model formulations provide little more than a
comprehensive check list of things that should be considered for incorporation in developing a business
model (Afuah and Tucci 2001).
The importance of creating a distribution channel, it is helpful to establish its role in a business model.
The business model, as elaborated by Chesbrough and Rosenbloom (2002), is a conceptual tool that
connects product development and customer needs. In the context of technology innovations, "the
business model provides a coherent framework that takes technological characteristics and potential as
inputs, and converts them through customers and markets into economic outputs." In this view, the
distribution channel is a key element of the value chain that converts the potential value of a technology
into realized value in the market. In the developing world context, a coherent, locally relevant business
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model is critical in meeting the goal of developing profitable, sustainable markets. The success of
products in developing countries, whether they are low-tech or high-tech, is highly correlated with the
extent to which program managers thought through their implementation of their business model
customized to the local conditions. In turn, building a distribution channel requires: • enticing local
entrepreneurs to invest alongside the technology to place orders, hold stock, break bulk, and make
deliveries to often remote locations (usually on roads of poor condition); • making sure that supplies
needed are available within the country; • training would-be entrepreneurs and helping them get started
with seed financing; • gaining the trust of established local entrepreneurs to franchise them and upgrade
their standards of quality in manufacturing or customer service; • creating original sales channels by
leveraging advocates such as entrepreneurial women; and educating dealers and installers on new
practices such as warranties.
In summary, the business model must create an architecture that coordinates a wide variety of actors and
their investments. This is a more daunting task than in leading advanced economies, where the
distribution infrastructure already exists and companies can hire or partner with distributors to get their
products to market. In developing countries, enacting a business model must include the creation of key
elements that may not yet exist in-country (Chesbrough, Ahern, Finn, & Guerraz, 2006). Successful
NGOs such as ApproTEC and Grameen have taken steps to create or strengthen each node in the value
network so as to manage the external risk factors, such as weak infrastructure impairing transports of
products or parts. The extent of this challenge means that significant time is required to develop the
distribution system. Nonprofits may better address developing world issues because of their long-term
horizons and their comprehension of the overall system of use. Nonprofits primarily focus on social
benefits and see the profit model as a means to that end. Enlightened nonprofits view the profit model as
an exit option that facilitates sustainability once the nonprofits have moved on to new initiatives. What is
particularly notable about the Grameen phone story is the central importance of the business model to its
success. Grameen Phone grew out of Grameen Bank, which provided a system of financing and support
for individual entrepreneurs to develop small agricultural businesses. Grameen provides microloans that
borrowers use to purchase a cow, for example, from which they are able to derive an ongoing stream of
income from milk sales. Grameen provides training and support to enable the individual entrepreneur to
successfully manage their micro business. In developing the agricultural business financing and support
system, Grameen realized that they had in fact developed a fully functioning business model that
operated efficiently in the developing world context and enabled sustainable, profitable businesses for the
poorest segments of the population. Grameen Phone grew out of the realization by Grameen managers
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that they could simply replace the cow with a mobile phone, and the same value network that supported
agricultural businesses would also support communications businesses. The dominant success factor for
both Grameen Phone and Grameen Bank was the particular adaptation of the business model that they
innovated for the particular circumstances of a rural, developing world community. ApproTEC also
illustrates the importance of an effective business model (Chesbrough, Ahern, Finn, & Guerraz, 2006). It
has focused on building a solid business model for its products by establishing an entirely local supply
chain, from raw materials to manufacturing skills and distribution capabilities. As they have gained
experience, they have developed a template that they follow to develop new business models (see
below):
Source: Chesbrough, H., Ahern, S., Finn, M., &
Guerraz, S. (2006). Business models for
technology in the developing world: The role of
non-governmental organizations. California
management review, 48(3), 48-61.
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2. Challenges Facing For-Profit Firms in Building Robust Value Networks in Developing
Countries
Innovation is risky and time-consuming in the developed world. It is even more time-consuming in the
developing world, since some of the infrastructure needed to support a business model (such as
established distribution channels) is often absent. The west's culture of innovation is not characteristic of
cultures in developing economies where the same mode of living has been passed down through many
generations, with far less variation than in the west. In these societies, changes are slower to happen.
Typically, those at bottom of the pyramid have not yet developed consumer behavior patterns common
among western populations. Therefore, the time frame for product deployment and customer adoption is
fundamentally different from what it is in developed countries. Creating and enacting a business model
poses different challenges in developing countries as well. Contracts are seldom sufficient in developing
contexts. Courts are slow to act, sometimes viewed as corrupt, and judgments can be hard to enforce.
Relationships must be built through establishing trust and mutual interest (Chesbrough, Ahern, Finn, &
Guerraz, 2006). This is also true on the demand side. The benefits of the products in the local context
have to be demonstrated in the local context before customers will buy. Additionally, it can take time for
businesses to understand where a product is suitable, to experiment with changes to the product and
business model, and finally adjust their perceptions of the marketplace before deciding whether and how
much to invest. Overall, the process of implementing a business model is slower because each step
requires training and education of the consumers, as well as iterations of the business model. The poor
or non-existent transportation and communications infrastructure in the developing world makes this
process still slower. As a result, marketing requires a lot of time, and the adoption cycle is often
protracted over a much longer period of time than we are accustomed to in the west. Patience, time, and
resource-intensive efforts such as live demos at the retailers' shops or at markets are required. These
activities consume enormous amounts of time and likely render many business initiatives infeasible for
profit seeking firms from advanced economies. This is where NGOs come in. Unlike for-profit
organizations, nonprofits are freer from time constraints than for-profits. Nonprofits operating in the
developing world are very familiar with the huge need and with the slow adoption of solutions to that need
(Chesbrough, Ahern, Finn, & Guerraz, 2006). They have proven to be both innovative and successful in
this early-stage market building work (as in some of the cases cited above) and they are willing to work
with longer time frames. Nonprofits justify long lime frames by accounting for the social benefits of their
efforts, such as empowering local entrepreneurs or increasing participation of marginalized segments of
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the population in the local economy. Their willingness to exit the business once it has become profitable
enables them to act in ways that enhance the sustainability of the business after they have departed.
Formal advisory relationships are another mechanism to advance the business model. Applicable
government ministries from the local or regional government and important local leaders (e.g., tribal
leaders) might also be appointed. Both the company and NGO should provide representatives whose role
is to provide "voice" and advice, not to make decisions. If all goes well, the NGO will be able to "exit" the
project after it has become financially viable. At that point, the project's leadership will shift to the
company, while the NGO will move on to another project opportunity, using the success of this most
recent venture as a key selling point to future donors and private companies. In conclusion, there are
tremendous long-term business opportunities for companies to market technologies to the developing
world. However, addressing these opportunities will require substantial local knowledge and an
abundance of patience. Companies that jump into this on their own will become frustrated with the time
required to get results on the ground. Realizing these opportunities will require both appropriate
technologies appropriate business models. In the developing world context, it will take longer to build the
latter than the former (Chesbrough, Ahern, Finn, & Guerraz, 2006). Therefore, companies that wish to
prospect for gold at the bottom of the pyramid should seek out partnerships with savvy, structurally
patient NGOs. Together, they can build the business models that will drive sustainable business success
in these untapped markets over the long haul.
3. The business need for a business model and Financial Measurement
The concept of the business model is strongly associated with the emergence of e commerce and other
new economy businesses. It grew out of a need to encapsulate the essential features of a business in a
short descriptive document in order that a judgement could be made, for example by potential investors,
on whether the business was likely to achieve its financial and other objectives. In this context the
business model is designed to answer a series of questions essential to any business – who are the
customers, what do they value, how that value can be delivered to the customer at an appropriate cost
and how the business deploys its assets. It includes a description of the key assets, both physical and
intangible such as intellectual property, governance structure and management. It consists of both a
narrative of how the business works and the numbers – how it makes a profit. The concept came into
vogue when the spreadsheet provided an easy way to test the financial implications of the narrative in a
financial model which contained assumptions about costs, product demand, sales revenue and profit.
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The financial outcome of changes to the narrative, or assumptions about product demand, etc. can be
tested in the spreadsheet model (Margretta 2002). One reason for the popularity of the concept in the
new economy, appears to have grown out of the need for the emerging dot com firms to have a
comprehensive, but standard format, to explain to potential investors ‘how they were going to make their
money’. The value proposition of dot com firms typically involved an innovative service or process for
attracting a customer base. The proposed business model was often radically different. Often there was
no precedent, no business experience, for instance, on which to base likely demand levels. Accordingly,
investors demanded that the entire business strategy, processes and outcomes be summarised and
modelled in such a way that different scenarios could be tested. The narrative of the business model,
once reduced to a spreadsheet-based financial model that encapsulated and quantified all the salient
features of the proposed business, enabled potential investors to ‘stress test’ the business assumptions
ahead of the decision to invest. The quality of the documentation of the business model was an essential
part of the communication process between the entrepreneur and financier of the conceptualisation of the
business model. Indeed the efficiency of this process was often critical to the business being successfully
financed. An unsatisfactory documentation of a highly prospective business model, could result in the
failure of the business to be financed (Eliasson 2000).
The Business Model offers a simplified representation of how a company operates and creates value in
the long term (Casadeus-Masanell and Ricart, 2010). The knowledge of the Business Model allows users
to better understand the role of the different processes and resources in the value creation process
(Bukh, 2003), exemplified by the case of financial analysts in Nielsen and Bukh’s (2011) account of how
they engage in Business Model discussions. Among such reasoning, the concept of Business Models
has been proposed by scholars as a framework for non-financial reporting (Nielsen and Roslender, 2015;
Bini et al., 2016), with a focus on performance measures (Bini et al., 2018; Montemari et al., 2019).
Accounting for Business Model from a stakeholder theory perspective has been conceptualised by
Haslam et al. (2015) and Michalak et al., (2017) provide an overview of the state and the development of
Business Model disclosures in corporate reports.
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References
Afuah, A. and Tucci, C. (2001). Internet Business Models and Strategies: Text and Cases, McGraw-Hill
Irwin, London.
Allen I.. Hammond and C.K. Prahalad, (2004). "Selling to the Poor," Foreign Policy. 142 (May/June
2004): 30-37.
Amit, R. and Zott, C. (2001). ‘Value creation in e-business’, Strategic Management Journal, vol. 22, no.
6/7, pp. 493-520.
Bini, L., Dainelli, F. and Giunta, F. (2016), Business model disclosure in the Strategic Report: Entangling
intellectual capital in value creation process, Journal of Intellectual Capital, Vol. 17 No. 1, pp. 83-102.
Bini, L., Simoni, L., Dainelli, F. and Giunta, F. (2018), Business Model and Non-Financial Key
Performance Indi cator Disclosure, Journal of Business Models, Vol. 6, No. 2, pp. 5-9.
Bukh, P.N. (2003), The relevance of intellectual capital disclosure: a paradox?, Accounting, Auditing &
Account ability Journal, Vol. 16 No. 1, pp. 49-56.
Casadesus-Masanell, R. and Ricart, J. E. (2010), From strategy to business models and onto tactics,
Long Range Planning, Vol. 43 No. (2-3), pp. 195-215.
Chesbrough, H., & Rosenbloom, R. S. (2002). The role of the business model in capturing value from
innovation: evidence from Xerox Corporation's technology spin‐off companies. Industrial and corporate
change, 11(3), 529-555.
Chesbrough, H., Ahern, S., Finn, M., & Guerraz, S. (2006). Business models for technology in the
developing world: The role of non-governmental organizations. California management review, 48(3), 4861.
Eliasson, G. (2000). ‘The industrial potential of biotechnology: A competence bloc analysis’, in J. De La
Mothe and J, Noisi (eds), The Economic and Social Dynamics of Biotechnology, Springer, Heidelberg.
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Haslam, C., Tsitsianis, N., Andersson, T., & Gleadle, P. (2015). Accounting for business models:
Increasing the visibility of stakeholders. Journal of Business Models, Vol. 3 No. 1, pp. 62-80
Hedman, J. and Kalling, T. (2002). IT and Business Models: Concepts and Theories, Copenhagen
Business School Press, Copenhagen.
Margretta, J. (2002). ‘Why business models matter’, Harvard Business Online, January.
Montemari, M., Chiucchi, S. and Nielsen, C. (2019), Designing Performance Measurement Systems
Using Busi ness Models, Journal of Business Models, Vol. 7, No. 5, pp. 48-69.
Michalak, J., Rimmel, G., Beusch, P., & Jonäll, K. (2017). Business model disclosures in corporate
reports. Jour nal of Business Models, Vol. 5 No. 1, pp. 51-73.
Nielsen, C. and Bukh, P. N. (2011), What constitutes a Business Model: The perception of financial
analysts, International Journal of Learning and Intellectual Capital, Vol. 8 No. 3, pp. 256-271.
Nielsen, C. and Roslender, R. (2015), Enhancing financial reporting: The contribution of business
models, The British Accounting Review, Vol. 47, pp. 262-274
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