Business Models and their Elements
Position Paper for the International Workshop on Business Models, Lausanne, Switzerland,
4-5 October 2002
Alexander Osterwalder & Yves Pigneur
alexander.osterwalder@hec.unil.ch
yves.pigneur@hec.unil.ch
1 WHAT IS A BUSINESS MODEL?
In our view the term Business Model (BM) stands for a conceptual tool that contains a set
of elements and their relationships and allows to express the business logic of a specific
firm. Slywotzky (1995) calls this business design and understands it as 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 resources, goes to market,
creates utility for customers, and captures profit. It is the entire system for delivering
utility to customers and earning a profit from that activity. This definition illustrates very
nicely that most people speak about BMs when they really only mean parts of a it (Linder
and Cantrell, 2001). When some authors speak of the "auction BM", the "advertising BM",
the "subscription BM" and so on, they are wrong in the sense that these are merely
instances of a specific (but dominant) element of a BM, in this case the pricing and the
revenue model. But by using such a narrow view of BMs, most of the advantages of a
more conceptual and global approach are lost. By using a theoretical and generic
framework to describe BMs, one can easily capture, understand, share (Petrovic and Kittl,
2001), observe over time, and, maybe even measure and simulate BMs (Osterwalder and
Pigneur, 2002;). They are a new unit of analysis and interesting tool for innovation
(Stähler, 2001). A company's intrinsic Business Model (BM) must be understood as an
instance of the more theoretical idea of the concept of BMs.
2 BUSINESS MODEL FRAMEWORK
Slywotzky's description can be broken down in few simple pillars outlined by Markides
(1999), which are the "what", the "who" and the "how" of a business, to which we would
also add the "how much". In other words, these pillars allow to express what a company
offers, who it targets with this, how this can be realised and how much can be earned by
doing it. Such a schematic description of the company's business system can serve as a
basis for discussion or as a plan for implementation. The Business Model Framework
(BMF) outlined in this paper is a generic model with which companies can express the
business logic of their firm or even the one of their competitors. The framework we
subsequently present is composed of a set of objects that relate to each other and that can
be classified among the four categories mentioned above.
2.1 WHAT? Product Innovation
PRODUCT INNOVATION (PI) covers all aspects of what the firm offers its customers.
This comprises not only the company's bundles of products and services but the manner in
which it differentiates itself from its competitors. Product innovation is composed of the
VALUE PROPOSITION (VP), which can be decomposed into its VALUE BLOCKS
(VB). Each one of these blocks has a Description and the attributes Reasoning, Life Cycle,
Value Level, Price Level and Categorization.
Figure: Value Proposition
Description: This attribute simply describes a bundle of products and services that
together form a coherent value proposition
Reasoning: This attribute captures the reasoning on why the firm thinks its VP could be
valuable to the customer. Normally value is created either through use (e.g. driving a car),
reduction of the customer's risk (e.g. car insurance) or by making his life easier through
reduction of his efforts (e.g. home delivery of groceries).
Life Cycle: This attribute captures at which one of the five stages of the value life cycle
the VP creates value. This can be at the moment of the value creation (e.g. customization),
its purchase (e.g. Amazon's one-click shopping), its consumption (e.g. listening to music),
its renewal (e.g. software updates) or its transfer (e.g. disposal of old computers, selling of
used books).
Value Level: This attribute compares the VPs value level to the one of the competition's.
The scale goes from me-too (e.g. commodities), over imitation (e.g. pocket pc) and
innovation (e.g. Viagra in the 90's) to perfection (e.g. Swiss watches).
Price Level: This attribute compares the VPs price to the one of the competition's. The
scale goes from free (e.g. online newspapers) over economy (e.g. Southwest, EasyJet,
RyanAir) and market (e.g. stocks) to high-end (e.g. Rolex).
2.2 WHO? Customer Management
CUSTOMER MANAGEMENT (CM) covers all customer related aspects. This includes
the definition of target customers, the means to reach and communicate with him, as well
as the relational strategy the firm aims to establish with the customer.
2.2.1 Target Customer
A firm generally creates value for a specific TARGE CUSTOMER (TC) segment. We
distinguish between more traditional marketing segmenting (e.g. middle-class working
mother) and the relatively recent concept of communities of interest (Hagel and
Armstrong, 1997).
Figure: Target Customer
2.2.2 Channels
CHANNELS (CH) refer to the way a firm “goes to market” and how it actually “reaches”
its customers (Hamel, 2000). ICT has had an important impact on channels by increasing
the range of them and making new ways of reaching the customer possible. The process of
eliminating middlemen (disintermediation)(Benjamin and Wigand, 1995), shortening
channels (direct selling), introducing new mediation (cybermediaries)(Sarkar et al., 1995)
or cross-channel selling have made channel management increasingly complex and
indispensable. The expansion of the range of channels has also multiplied the potential
conflicts between channels (Anderson et al., 1998). A channel can be decomposed in its
elements that we call LINK (LI). Each one of these Links has a Description and the
attributes Reasoning and Customer Buying Cycle.
Figure: (Distribution) Channel
Description: This attribute simply describes the function and nature of the Link.
Reasoning: This attribute captures the reasoning on why the firm thinks this part of the
channel is necessary to get in touch with the customer.
Life Cycle: This attribute captures to which one of the four stages of the customer buying
cycle the L belongs to. This can be the awareness phase (e.g. getting the customers
attention through advertising), the evaluation phase where the customer compares his
needs to the company's offer (e.g. limited software trial), the purchase (e.g. online or
offline transaction) or the after-sales phase (e.g. troubleshooting and maintenance).
2.2.3 Customer Relationship
When "getting in touch" with the customer the firm automatically establishes a certain
CUSTOMER RELATIONSHIP (CR). This can be a first time relationship (e.g. customer
acquisition), an existing relationship (e.g. customer retention, add-on selling), or a one
time relationship (e.g. transaction). ICT has an important role to play in managing CR
because it provides the tools for the relationship MECHANISMs of which a CR is
composed of. Personalization (e.g. Amazon's book recommendations)(Piller et al., 2000),
trust (e.g. the TRUSTe label, eBay's escrow service or SGS's certification and
verification)(Friedman, 2000; Dimitrakos, 2001) or security (e.g. encryption).
Figure: Customer Relationship
2.3 HOW? Infrastructure Management
INFRASTRUCTURE MANAGEMENT (IM) covers all elements related to the
configuration of activities and resources between the firm and its partners in order to
create value and reach the customer.
2.3.1 Capabilities and Resources
A firm has to ensure that it disposes of the necessary CAPABILITIES (CA) to deliver its
value proposition (e.g. home delivery of small quantities for online retailers)(Bagchi and
Tulskie, 2000; Wallin, 2000). CA are based on a range of RESOURCES (RE) that can be
owned by the firm or a partner organization.
Figure: Capabilities and Resources
2.3.2 Value Configuration
This value proposition of a firm is the outcome of a VALUE CONFIGURATION (VC) of
in-house and outsourced activities and processes (see also Gordijn et al., 2001). This
configuration can take the form of a value chain (Porter et al., 1985), a value shop or a
value network (Stabell et al., 1998). Its ACTIVITIES (AC) have a Description and the
attributes Reasoning and Categorization.
Description: This attribute simply describes the function and nature of the AC.
Reasoning: This attribute captures the reasoning on why the firm thinks this part of the
VC is necessary to create value.
Figure: Value Configuration
2.3.3 Partnership
PARTNERSHIPS (PA) help firms leverage their core competencies. By concentrating on
what they do best and partnering for most other activities a company can lower its costs
and strengthen its market position. PAs can take different forms, such as integrated
relationships (e.g. Collaborative Planning, Forecasting and Replenishment (CPFR) at WalMart), buy-side online platforms (e.g. Nestlé, Danone and Henkel's CPGmarket.com) or
service contracting (e.g. Seafax's industry-wide credit reporting for the seafood industry).
Partnerships are based on a range of AGREEMENTs (AG).
Figure: Partnership
2.4 HOW MUCH? Financial Aspects
The FINANCIAL ASPECTS are the culmination of a business model. The neatest VP and
the finest CR are only worth being maintained if they guarantee a long-term financial
success to the company. This simply means that the revenue model and the costs have to
be in balance in order to make a profit possible.
2.4.1 Revenue Model
A sound business model is one in which a firm can translate its VP into a range of
REVENUE STREAMS (RS) from its customers. A RS can have a set of different
PRICING (PR) mechanisms. The new pricing mechanisms enabled by ICT should be used
in order to maximize revenues. Particularly the Internet has had an important impact on
pricing and has created a whole new range of pricing mechanisms (e.g. auctions, pay-peruse, yield management)(Klein and Loebbecke, 2000).
Figure: Revenue Model
2.4.2 Cost structure
The COST STRUCTURE (CS) measures all the costs the firm has to incur to create,
market and deliver the VP. It sets a price tag on all the resources, assets, activities and
partner network relationships and exchanges that cost the company money. These costs
are booked in the firms ACCOUNTS.
Figure: Cost Structure
3 CONCLUSION
The generic BM framework provided in this paper allows a company to seize the logic of
its business. It can capture the different elements of its BM in a more formal way. By
doing this it will better understand its business, will be able to share this understanding
among stakeholders, can easily observe its BM over time, can better define a range of
indicators to follow and can create a portfolio of scenario BMs it might want to pursue in
the future.
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5 Figures
Figure 1: Business Model Framework
Figures 2-10: Business Model Components