A Review of the Electronic Commerce Literature to Determine the
Meaning of the Term ‘Business Model’.
Susan Lambert
School of Commerce
Flinders University of South Australia
SCHOOL OF COMMERCE
RESEARCH PAPER SERIES: 03-5
ISSN: 1441-3906
Abstract
In the electronic commerce literature there is confusion as to the meaning
and purpose of the term ‘business model’.
There are wide ranging
perceptions of the term causing many to wonder just what a business
model is. Definitions vary as do the designated attributes of business
models thereby creating problems for academics and professionals relying
on the literature for guidance in understanding business models.
This paper presents and analyses the definitions of ‘business model’
presented in the electronic commerce literature along with the designated
business model attributes. The typologies and taxonomies of business
models present in the literature are examined and evaluated.
It is
concluded that until there is some consensus as to the definition of
‘business model’ and the attributes agreed upon, useful taxonomies of
business models would not be forthcoming.
Introduction
A term that is used extensively in the electronic commerce literature is the term
‘business model’.
It has become a buzzword amongst electronic commerce
academics and business professionals. Like many buzzwords though it’s meaning has
become blurred with individuals attaching different meanings to it to suit their needs.
The term ‘business model’ is used in many contexts and it is difficult to understand
exactly what a business model is (Timmers, 1999; Mahadevan, 2000; Hawkins, 2002).
Some authors do not try to define the term but do refer to business models and/or
taxonomies of business models (Bambury, 1998; Saloner and Spence, 2002; Chen,
1
2001). Others such as Kalakota and Robinson (1999) and Whiteley (2000) do not use
the term ‘business model’ at all but use terms such as business designs and strategies.
Many authors use the terms ‘business model’, ‘e-business model’ or ‘Internet business
model’ interchangeably.
For the purposes of this paper it is not important to
distinguish between traditional and web based businesses as the term ‘business model’
applies equally to both.
The aim of this paper is to explore the literature for the meaning of the term ‘business
model’ and to determine the attributes afforded business models. Furthermore, this
paper reveals the shortcomings of business model taxonomies and other classification
methods presented in the literature.
Business Model Definitions Derived from the Literature
There exists no generally accepted definition of business model in the electronic
commerce literature. The term is defined differently by many authors and there is
little consensus as to the attributes of business models. Timmers (1999:p32) observes
that “ The literature about Internet electronic commerce is not consistent in the usage
of the term ‘business model’ and moreover, often authors do not even provide a
definition of the term”. Table 1 lists fourteen different definitions of business model.
The language used to describe business models leaves the reader wondering just what
a business model is. Rappa (2003), Afuah and Tucci, (2001) and Turban et al (2002)
refer to business models as ‘methods’ by which firms do business. Timmers (1999),
and Dubosson-Torbay et al (2002) refer to business models as ‘architectures’, whilst
Krishnamurthy (2003:p14) states that, “ A business model is a path to a company’s
profitability”.
Others refer to business models as descriptions or specifications
(KMLab Inc, 2000, in Chesbrough and Rosenbloom, 2002; Gordijn et al, 2000a&b;
Weill and Vitale, 2001; Elliot, 2002; Hawkins, 2002).
Rayport and Jaworski (2001:pxiv) add to the confusion in the preface to their book
with the statement “While many believe that Internet businesses do not have business
models, we strongly disagree”. This statement suggests to the reader that firms can
choose whether or not to have a business model however it is apparent even from the
diverse terminology used by other authors that a business model, be it a method, an
2
architecture, a path, a specification or a description, exists for every firm; it is just a
matter of articulating it.
Table 1: Definitions of Business Models
“An architecture for product, service and information flows, including a description of the
various business actors and their roles; and a description of the potential benefits for the
various business actors; and a description of the sources of revenue.” Timmers (1999; p32)
“…a business concept that has been put into practice.” Hamel (2000: p66)
“An important part of an e-commerce information systems development process is the design
of an e-business model. Such a model shows the business essentials of the e-commerce
business case to be developed. It can be seen as a first step in requirements engineering for ecommerce information systems.”
“…the main goal of a business model is to answer the question: “who is offering what to
whom and expects what in return”. Therefore, the central notion in any business model
should be the concept of value” Gordijn, Akkermans and van Vliet (2000a)
“…very precise way [of highlighting the way of doing business] because stakeholders such as
chief executive officers, marketers and business developers should agree on it, and because it
is a crucial bottom line part of the requirements for an electronic commerce system”.
Gordijn, Akkermans and van Vliet (2000b)
“…a Business model is a description of how your company intends to create value in the
marketplace. It includes that unique combination of products, services, image, and
distribution that your company carries forward. It also includes the underlying organization
of people, and the operational infrastructure that they use to accomplish their work” KMLab
Inc., 2000, in Chesbrough and Rosenbloom, 2002),
“ In the most basic sense, a business model is a method of doing business by which a
company can sustain itself- that is, generate revenue. The business model spells out how a
company makes money by specifying where it is positioned in the value chain”. Rappa
(2003)
“…the method by which a firm builds and uses its resources to offer its customers better value
than its competitors and to make money doing so….. A business model can be conceptualised
as a system that is made up of components, linkages between components, and dynamics.”
Afuah and Tucci (2001; p3)
An Internet business model is defined by the same authors as,
“…the method by which a firm plans to make money long-term using the Internet…The
Internet business model is the system-components, linkages, and associated dynamics- that
take advantage of the properties of the Internet to make money” Afuah and Tucci (2001: p6)
“A description of the roles and relationships among a firm’s consumers, customers, allies, and
suppliers that identifies the major flows of product, information, and money, and the major
benefits to participants.” Weill and Vitale (2001:p34)
“A loose conception of how a company does business and generates revenue”, Porter
(2001:63)
“A business model is nothing else that an architecture of a firm and its network of partners for
creating, marketing and delivering value and relationships capital to one or several segments
of customers in order to generate profitable and sustainable revenue streams.” DubossonTorbay, Osterwalder and Pigneur (2002:p7)
“A business model is a description of the commercial relationship between a business
enterprise and the products and/or services it provides in the market.” Hawkins (2002:p3)
3
Table 1: (cont)
“…a method of doing business by which a company generate revenue to sustain itself. The
model spells out how the company is positioned in the value chain.” Turban, Lee, King and
Chung (2002:p6)
“A business model is an abstraction of a business identifying how the business profitably
makes money. Business models are abstracts about how inputs to an organization are
transformed to value-adding outputs.” Betz (2002:p1)
“Business models specify the relationships between different participants in a commercial
venture, the benefits and costs to each and the flow of revenue. Business strategies specify
how a business model can be applied to a market to differentiate the firm from its
competitors.” Elliot (2002:p7)
“A business model is a path to a company’s profitability, an integrated application of diverse
concepts to ensure the business objectives are met. A business model consists of business
objectives, a value delivery system, and a revenue model.” Krishnamurthy (2003:p14)
The choice of descriptor does not present a real issue in understanding business
models although it can create confusion in the first instance.
A study of the
definitions reveals that all authors are intending that the business model depict the
way the business operates.
An examination of table 1 reveals that the definitions do differ significantly in scope.
At one extreme the business model is said to contain detail of the internal workings of
the business including operational and organisational infrastructure along with how
the business intends to create value and distribute it. (KMLab Inc., 2000, in
Chesbrough and Rosenbloom, 2002)
Those who see the business model as equivalent to the enterprise model support this
view. Persson and Stirna’s survey revealed that enterprise modelling was useful in
creating “a multifaceted ‘map’ of the business as a common platform for
communicating between stakeholders.” (Persson and Stirna, 2000). Consistent with
this view Gordijn et al (2000a) propose that the business model should illustrate the
business essentials necessary for electronic commerce information systems
requirements engineering. Gordijn et al (2000b) propose a business model ontology
that “…enhances business-IT alignment and smoothens the transition to e-commerce
systems development.” These business models must represent the internal workings of
the business and therefore have the potential for translation to programmable system.
The other perspective of business models that emerges from the literature focuses
only on the relationship of the business with other entities in the value network.
4
(Timmers, 1999; Rappa, 2003; Weill and Vitale, 2001; Elliot, 2002; Turban et al,
2002; Hawkins, 2002). This abstract notion of how the business operates within its
value network recognises that the business model must be considered together with
the marketing model, (Timmers, 1999) and the business strategy (Elliot, 2002; Weill
and Vitale, 2001). Timmers (1999) states that, “…it is useful, beyond business
models, also to define ‘marketing models’.”, (Timmers, 1999:p32) implying that the
marketing model is not part of the business model. Elliot (2002:p7) states “Business
strategies specify how a business model can be applied to a market to differentiate the
firm from its competitors...”. Weill and Vitale (2001) draw a distinction between
business models and business strategies and suggest that the business model and
business strategies must be compatible.
The common factor evident in all definitions contained in Table 1 is the requirement
that the business model depict the business in relation to the other entities that form
part of the value network.
Although some definitions are inclusive of internal
business processes and others are not, they all require a description of how the firm
expects to generate revenue and how it relates to the other entities in the value
network. This suggests that the essential focus of a business model is the interaction
of the firm with its market place.
Business Model Attributes
Some definitions of business models are quite explicit in terms of their attributes
however the more abstract definitions merely allude to the attributes that need to be
included. Hamel captures the essence of a business model in his definition,
…A business model is nothing more than a business concept that
has been put into practice. (Hamel, 2000: p66)
but does not provide any guidance as to what to include in the model itself. The
KMLab Inc. (cited in Chesbrough and Rosenbloom, 2002) definition is at the other
end of the spectrum, specifying in detail the many attributes that should be included in
the business model
5
Table 2: Attributes of Business Models
Hamel (2000)
Customer Interface:
Fulfillment and
support
Information and
insight
Relationship
dynamics
Pricing structure
Core Strategy:
Business mission
Product/market scope
Basis for
differentiation
Strategic Resources:
Core competencies
Strategic assets
Core processes
Value Network:
Suppliers
Partners
Coalitions
Timmers (1999)
Products, services and
information flows.
Business actors and
their roles.
Potential benefits for
business actors.
Sources of revenue.
Weill and Vitale
(2001)
Major entities
Firm of interest:
Customers
Suppliers
Allies
Major flows of:
Products
Information
Money
Revenues and other
benefits to each
participant
Rayport and
Jaworski (2001)
Value proposition or
value cluster for
targeted customers
Marketspace offering –
product, service,
information
Unique resource
system
Financial models
Hawkins (2002)
Transaction mode
Relationship between
producer and user
Revenue mode
How revenue streams
are generated and
Exchange mode
How the value of an
item is determined
and exchanged
Afuah and Tucci
(2001)
Customer value
Scope (of market and
products)
Price
Revenue sources
Connected activities
Implementation
(organization structure,
systems, people, and
environment)
Capabilities
Sustainability
(competitive
advantage)
Chesbrough et al
(2002)
Articulate the value
propositions
Identify a market
segment
Define the structure of
the value chain
Estimate the cost
structure and profit
potential
Describe the position
of the firm in the value
network
Formulate the
competitive strategy
Laudon and Traver
(2001)
Value proposition
Revenue model
Market opportunity
Competitive
environment
Competitive advantage
Market strategy
Organizational
development
Management team
Dubosson-Torbay et
al (2002)
Product Innovation:
Target customers
Value proposition
Capabilities
Customer Relationship:
Get a feel
Serving
Branding
Infrastructure
Management:
Resources/Assets
Activities/Processes
Partner Network
Financial Aspects:
Revenue
Profit
Cost
6
The remaining definitions also specify the required attributes but they differ in their
view of what in fact should be contained in the business model and what should be
left to other devices or tools such as business plans and marketing models. Table 2 is
a compilation of the attributes that authors either specify in their business model
definition or specify separately.
Hamel (2000), Rayport and Jaworski (2001), Afuah and Tucci (2001), DubossonTorbay et al (2002), and KMLabs (cited in Chesbrough & Rosenbloom (2002) include
in the business model, the resources and internal elements of the organisation required
to operationalise the business model.
The view taken by other authors (Gordijn et al, 2000a; Timmers, 1999; Weill and
Vitale, 2001; Hawkins, 2002; Krishnamurthy, 2003) is to separate the business model
from the operational requirements. Resources, organisation structure and strategy are
dealt with separately. Weill and Vitale (2001), for example, take the view that
infrastructure, critical success factors and core competencies flow from each unique
business model but are not attributes of the business model itself.
The attributes are derived from the business model definition even though they are
not, in some cases, explicit in the definition. Where the definition extends to the
inclusion of operational factors then attributes relating to these factors are required.
Business Models Categories Identified in the Literature
Many authors put forward categories of business models. They are referred to as
taxonomies, categories, business types and business designs. Two broad categories
that permeate the literature are:
•
Presence in physical and/or Internet based markets i.e. pure-play or bricksand-clicks
•
Buyer type, (i.e. B2B, B2C, B2G, G2B, G2C, P2P).
Beyond these classifications based on transaction channel and customer type
respectively, the consensus ends. Business models are classified according to degree
7
of innovation and functional integration (Timmers 1999), the revenue model, value
offering (e.g. information, product or service) and pricing model to mention a few. In
general the descriptions consist of unstructured narrative making it difficult to
distinguish one model from another and difficult to appreciate the underlying resource
and infrastructure requirements of each.
Bambury (1998) offers an empirically derived taxonomy of both “transplanted realworld business models and native Internet business models” identifying eight
transplanted real-world business models and six native Internet business models.
Rappa (2003) proposes eight major categories of business models with no fewer than
twenty-seven sub-categories. Rappa (2003) acknowledges that “Presently there is no
single, comprehensive and cogent taxonomy of web business models one can point
to.”
Table 3 is a compilation of the business model categories identified in the literature. It
indicates that authors take vastly different approaches to differentiating between
business models. Authors including Weill and Vitale (2001), Schneider and Perry
(2000) and Eisenmann (2002) have broad categories whereas others such as
Rappa (2003) and Bambury (1998) distinguish business models on as little as one
characteristic such as the pricing model or the nature of the product on offer.
Kalakota and Robinson (1999) do not use the term ‘business model’, rather they list
seven e-business designs that they then refine adding detail that relates to business
strategy. Krishnamurthy (2003) does not provide a clear listing of business models,
rather she distinguishes between pure-play and bricks-and-clicks business models and
then identifies thirteen pure-play business models throughout her book.
A study of these business model categories provides an awareness of the ways that
businesses are utilising electronic commerce but they do not provide a framework by
which business models can be compared. Hawkins (2002:p1,2) observes that the
literature lacks “…the systematic development of taxonomies and frameworks” and
that “ Recent attempts to create taxonomies of business models mostly amount to no
8
Table 3: Business Model Categories
Bambury (1998)
Translated RealWorld Business
Models
Mail-order model
Advertising -based
model
Subscription model
Free trial model
Direct marketing model
Real estate model
Incentive scheme model
B2B
Combinations of the
above models
Native Internet
Business Models
Library model
Freeware model
Information barter model
Digital products and
digital delivery model
Access provision model
Website hosting and
other models
Kalakota &
Robinson (1999)
Category killer
Channel reconfiguration
Transaction Intermediary
Infomediary
Self-service innovator
Supply-chain innovator
Channel mastery
Timmers (1999)
E-Shop
E-procurement
E-malls
E-auctions
Virtual
Communities
Collaboration
Platforms
Third-party
Marketplaces
Value-chain
Integrators
Value-chain Service
Providers
Information
Brokerage
Trust Services
Weill and Vitale
(2001)
Content Provider
Direct to Customer
Full-Service Provider
Intermediary
Shared Infrastructure
Value Net Integrator
Virtual Community
Whole-of enterprise/ Govt
Eisenmann (2002)
Online Portals
Online content
providers
Online retailers
Online brokers
Online market makers
Networked utility providers
Application service
providers
Turban et al
(2002)
Name your price
Find the best price
Affiliate marketing
Group purchasing
Electronic tendering
system
Customisation and
personalisation
Electronic marketplaces &
exchanges
Supply chain improvers
Collaborative commerce
Rappa (2003)
Broker
Buy/Sell Fulfilment
Market Exchange
Business Trading
Community
Buyer Aggregator
Distributor
Virtual Mall
Metamediary
Auction Broker
Reverse Auction
Classifieds
Search Agent
Bounty Broker
Advertising Model
Generalized Portal
Personalized Portal
Specialized Portal
Attention / Incentive
marketing
Free Model
Bargain Discounter
Infomediary Model
Recommender System
Registration Model
Merchant Model
Virtual Merchant
Catalog Merchant
Bit Vendor
Click and Mortar
Manufacturer Model
Brand Integrated
Content
Community Model
Voluntary Contributor
Knowledge Networks
Subscription Model
Utility Model
Krishnamurthy
(2003)
Bricks-and-clicks
Pure-play
B2C
Direct sellers
Intermediaries
Advertising-based
models
Community-based
models
Fee-based models
B2B
EDI/Extranets
B2B Marketplaces
C2C
Auctions
Peer-to-peer
C2B
Idea collectors
Reverse auctions
Complaint centres
Paid advertising models
9
more than random, unrelated lists of business activities that just happen to occur on
Internet platforms.” This view is supported by the collection of business model
categories listed in table 3, most of which are unstructured and appear to be developed
in an ad hoc manner with no direct reference to the business model attributes
proposed by the respective authors.
Weill and Vitale (2001) do use a structured methodology in defining their eight
‘atomic e-business models’. Each model is significantly different to the others in
terms of the established criteria outlined in table 2. The atomic business models are
theoretically derived typologies rather than empirically derived taxonomies.
Summary
This paper has summarised the treatment of the term ‘business model’ in the
electronic commerce literature. It has provided, in table 1, the definitions of business
model and revealed that although definitions differ in scope they all require the
inclusion of value network relations. The most prominent difference in the definitions
is the inclusion or exclusion of internal operations and resources of the business
creating a dichotomy of business model definitions.
An analysis of business model attributes provided further understanding of the
concept of ‘business models’. As with the business model definitions, two views are
taken; those that include attributes relating to internal operations and those that
propose only value network related attributes.
Finally a survey of business model categories was conducted on the literature
concluding that in the most part unstructured, ad hoc business model identification is
present. A number of business model typologies are proposed along with taxonomies
based on empirical data. The taxonomies are not highly structured in that they do not
analyse business cases according to set criteria; rather, they describe them in
unstructured text making comparisons between business models difficult. Weill and
Vitale (2001) is the exception providing a structured analysis of eight ‘atomic’
business models.
10
Structured taxonomical research is needed to provide a means of understanding
existing business models and comparing their function. It should be possible to imply
resource and organisational requirements that underlie the various business models.
The constructs of the taxonomy should be derived from the business model attributes.
The business model attributes should be derived from the business model definition.
However, it is not surprising that there is a lack of such research since to date there is
no consensus as to the meaning of the term ‘business model’.
References
Afuah, Allan and Tucci, Christopher L. Internet Business Models and Strategies.
McGraw-Hill Irwin; 2001.
Bambury, Paul. A Taxonomy of Internet Commerce.
http://www.firstmonday.dk/issues/issue3_10/bambury/index.html. 1998. Last
accessed April 10, 2003.
Betz, F. Strategic Business Models. Engineering Management Journal. March
2002.
Chen, S. Strategic Management of e-Business. Chichester: Wiley & Sons; 2001.
Dubosson-Torbay, M.; Osterwaldeer, A., and Pigneur, Y. E-Business model
design, classification and measurements . Thunderbird International Business
Review. 2002; Jan/Feb 2002.
Eisenmann, Thomas R. Internet business models, text and cases. New York:
McGraw-Hill Irwin; 2002.
Elliot. Electronic Commerce: B2C Strategies and Models. Chichester: PrenticeHall; 2002.
Gordijn, J.; Akkermans, H., and van Vleit, H. Business Modelling is not Process
Modelling. 2000a. http://www.cs.vu.nl/~gordijn/research.htm Last accessed April
10, 2003.
Gordijn, J.; Akkermans, H., and van Vleit, H. What is an electronic business
model? 12th International Conference on Knowledge Engineering and Knowledge
Management, EKAW-2000; 2-6 Oct 2000; Juan-les-Pins, France.
Hamel, G. Leading the Revolution. USA: Harvard Business School Press; 2000.
Hawkins, R. The Phantom of the Marketplace: Searching for New E-Commerce
Business Models. Euro CPR 2002; March 24-26; Barcelona. 2002.
11
Kalakota, R and Robinson, M. e-Business Roadmap for Success. Reading:
Addison Wesley Longan, Inc; 1999.
KMLab Inc, 2000 in Chesbrough, H. and Rosenbloom, R. The Role of the
Business Model in Capturing Value from Innovation: Evidence from Xerox
Corporation's Technology Spinoff Companies . Harvard Business School Working
Paper . 2002
Krishnamurthy, S. E-Commerce Management, Text and Cases, Thompson
Learning; 2003.
Laudon, K. C. and Traver, C. G. E-Commerce: business, technology, society.
Boston: Addison-Wesley; 2001
Mahadevan, B. Business Models for Internet-based E-commerce: An anatomy.
California Management Review. Summer 2000
Persson, A. and Stirna, J. An explorative study into the influence of business
goals on the practical use of Enterprise Modelling methods and tools. In G.
Harindranath et. al. (ed.), New Perspectives on Information Systems Development:
Theory, Methods and Practice, Kluwer Academic, New York, USA, pp. 215-288;
2000
Porter, M. Strategy and the Internet. Harvard Business Review; March 2001
Rappa, P. Business Models on the Web.
http://digitalenterprise.org/models/models.html Last accessed April 20, 2003.
Rayport and Jaworski. Electronic Commerce. New York: McGraw-Hill; 2001.
Saloner, G. and Spence, A. M. Creating and Capturing Value Perspectives and
Cases on Electronic Commerce. New York: Wiley & Sons Inc; 2002.
Schneider, G and Perry, J. Electronic Commerce. Course Technologies; 2000
Timmers, P. Electronic Commerce: Strategies and Models fro business-to-business
trading. Chichester: Wiley & Sons Ltd; 1999.
Turban, E.; King, D; Lee, J.; Warkentin, M., and Chung, M. Electronic
Commerce; a Managerial Perspective, International Edition. New Jersey: Pearson
Education, Inc; 2002.
Weill, P. and Vitale, M. R. Place to Space: migrating to ebusiness models. Boston:
Harvard Business School Press; 2001.
Whiteley, D. e-Commerce: Strategy, Technologies and Applications. Berkshire:
McGraw-Hill Publishing Company, 2000.
12