Already in May, I have heard that Long Range Planning had published a Special Issue on Business Models. Today, I got hands on it thanks to Andres Sundelin from The Business Model DataBase.

You can access the article via http://www.sciencedirect.com/science/journal/00246301 as a guest. Very interesting topics like “Business Models as Models” by C. Baden-Fuller and M. Morgan or “Business Models, Business Strategy and Innovation” by D.J. Teece are included, so the Special Issue is definitely worthwhile reading.  That is the happy part of the Special Issue.

C. Baden-Fuller, M. Morgan, Henry Chesbrough and business model

What makes me sad about the issue is the closed and self-referential world of the academia in Strategy Research. The topic was broadly covered in early 2000 at least in two Ph.D. theses, I know. However, so far I have found only two citation to Alex Osterwalder’s work in the article “Business Model Innovation: Opportunities and Barriers” by Henry Chesbrough and in the article by Wirtz & al.. Thanks Henry, that you take your open innovation approach also your research. Thanks Bernd.

I hoped to find some background on Business Models in Baden-Fullers and Morgan’s article. Negative. They seemed to have not heard from Osterwalder before, they do not cite him. They are not mentioning ideas of Gary Hamel on business concept innovation from 2000, a concept very close to business model innovation. They cite only their own kind. They still live in their closed community where it is extremely important from whom the idea is coming, even when the original idea is 10 years old and not even cited. That is what I call a long latency!

Origin of business model thinking

The origin in business model thinking dates back to the information management researchers that were building information systems. To do so, they needed models of the reality. They talked about data models, process models, enterprise models and later about business models. When the first Internet entrepreneurs were talking about their strategy, they talked naturally about their business model since that was a language familiar to them. From there, the term transcended to Strategy. E.g., I wrote my Ph.D. thesis exactly at this crossing of information systems and strategy. My supervisors were Prof. Beat Schmid, background in computer science and Prof. Georg von Krogh, a strong researcher in Strategy. Quite a balancing act.

Business model is just a model of a business

When I was writing my Ph.D. thesis, Prof. von Grogh told me that I needed a unit of analysis for my research. I know the traditional culprits like industry or firm but they did not fit into what we saw in the New Economy. Industry boarders become meaningless; competition came from competitors you had not even heard before.

Therefore, my answer to Georg was very simple: I used the business model as my unit of analysis. He said fine. Just define it. Well, easy said difficult done. I was positive at the beginning that there must be something since we all got Masters of Business Administration so Business should be defined. Nope. Not really.

And again, it was Peter Drucker who had worked on this. He asked the simple questions “What business are you in?” and “What is the purpose of a business”.  And this is exactly what a business model should answer when used for strategizing.

Chesbrough and Rosenbloom (2002) explain the antecedents to the business model concept in their article “The Role of the Business Model in Capturing Value from Innovation: Evidence from Xerox Corporation’s Technology Spinoff Companies”. It is interesting that it was not the academic world that saw the necessity to have the business in focus for strategy but the real world. The business is where the competition is. Welcome to the real world.

Businesses are not a technical machine with input and output factors. Businesses are places where human beings work together for a common goal and therefore the culture in a business is a defining part of a business and therefore also for the business model.

Most definitions of what a business model is are rather technical. We talk about components, patterns, building blocks. We make a lot of fuss about how we rearrange the components as if they were just Lego bricks. We believe that having in mind a great new business model is already a business model innovation.

Where are the people?

Ups, no! That does not work. Somehow the most important “building block” of a business is missing: The human being that designs, shapes and makes the business work and the customer who has to buy into the new value proposition and pay. And here again we have the human factor. “[I]nnovation is not what innovators do but what customers adopt.” We always have to remember what Michael Schrage is saying. It is the customer acceptance that makes an innovation.

Zappos and its core values as a business model innovation

A great example to see how the culture and values can be the uniqueness and differentiation factor in its business model is Zappos . Looking from a technocratic point of view, Zappos is just an eShop for shoes with a great customer services.

But with this limited view you forget that it is not just the great customer service that makes the difference. You need people that can provide this great service. You need values in the firm that helps you to make the right decision in favor of your customers. And your values should be reflected in your controlling systems since otherwise people just do what they are measured for.

Zappos gives a great example that culture and core values is more than just having an HR department with marketing material for recruting. Check out what Zappos is saying about its culture. This culture was Amazon worth almost $1 billion when it announced it wants to by Zappos in July 2009.

Culture and values are part of the business model

I use in change project where big corporations are looking for a better business model an adapted business model canvas. The canvas uses besides the main components value proposition, value architecture and revenue model also a box for culture and values. Together with my colleague Dr. Harry Wiener who is a psychologist by training we have developed three categories that make together the culture and values of a business.

• Leadership style answers the questions: How do we lead people? How much freedom do we give them in their daily work?
• Relationship style answers the question: How do we work together with our customers? How do we work together with our peers in the firm?
• Values answer the questions: What value governs our overall behavior? What values do we pursue?

I do use the adapted version of the business model canvas not in all cases since it must fit the task.

And the more components you have the less the people really try to grasp the complexity of the business. In cases where a cultural change is not needed I sacrifices  the culture for simplicity but add the culture and value dimension as soon as the new business model is designed and the implementation process is planned.

Unlearning and cultural change

From my work experience (having been a line manager for 7 years) and consulting experience the changes in the culture and values are by far more difficult than changing the business model since the traditional business model is so impeded in the heads of all people. Culture and values have to be unlearned and unlearning is the most difficult task as we see from all big American car firms or from the bankruptcy of retail conglomerate Karstadt/Quelle aka Arcandor.

[update:] Via netzwertig.com I found the following blog post of disgruntled journalist from the German media group WAZ. Unfortunately, the article is in German but it shows extremely well how people can react to changes. The journalist discuss if – as print journalist – they can be forced to take a camcorder with them when investigating a story. That sounds ridiculous for outsiders but the traditional culture of journalist is very class oriented and a print journalist is a print journalist and therefore he/she has nothing to do with pictures or even video.

So in the case of the WAZ their strong journalistic network in the Ruhrgebiet is not only an asset for their online venture (DerWesten.de) but also a huge libility due to its traditional core values.

Even when you have the best new business model you will fail if you cannot change the traditional values that impede change. So the culture should be included on the business model canvas if you do a business model innovation in a traditional firm. Otherwise, your business transformation will fail.

doublethink by duncan

As I have argued in my last post, I think we use in strategy and in management in general too many generic and meaningless words. And I think we use also too many meaningless graphs and pictures to say nothing as a matter of fact. Visualization does not help you if your strategy is bad. Sorry, Alex for this .

Every decent firm claims in restructuring that it is concentrating on its core competencies when divesting or closing parts of its firm. Well, and often it is the same firm that argued some time ago that it was necessary to buy this now divested firm since it wanted to offer full service to its customers. We have so many words for “Sorry, it did not work. We just could not make it work”. Why are we so afraid about the truth?

Management Newspeak

In management we have invented Newspeak. Original, Newspeak is a fictional language in the novel Nineteen Eighty-Four by George Orwell. The basic idea behind Newspeak is to remove all shades of meaning from language. While in Orwell’s novel the government tries to introduce Newspeak to the people in order to make the people more compliant to its will, in the case of management it is our own fault. We managers use our own Newspeak and we have taken all meaning out of it.

Newspeak is all about saying almost nothing with great sounding words. Every bank had its risk management system in place, used sophisticated mathematical simulations, had dozens of compliance officers, trusted well-paid analyst in their triple A ratings. And what was the result? They did not see that a mortgage given to somebody with inadequate income will always be a bad loan regardless how often you mix it with other subprime loans and regardless how much financial modeling you apply.

And I will hear now all my friends from investment banking that you can decrease the risk by pooling loans. Well, this pooling works well with uncorrelated loans but if they are all bad loans in the same market, well, then bad stays and bad regardless of how much you diversify.

For a great overview of financial Newspeak,  click here for a pdf file. It is “The [now defunct] Lehman Brothers Guide to Exotic Credit Derivatives”. You will learn everything about Credit Default Swaps (CDS), Collateralized Debt Obligation (CDO) and their modeling. The basic ideas were great at the beginning but when the bankers believed that they could escape the laws of gravity the products turned into bombs to the world economy.

And this is typical for Newspeak, at the beginning the words had a meaning but when they became popular, the meaning was diluted and lost.

Please be politically incorrect in your firm!

In Nineteen Eighty-Four the government calls a thought that is against the common way of thinking a thoughtcrime. Thoughtcrimes are thoughts that are unorthodox and outside the dominant logic.

I want you to commit these thoughtcrimes in your firms. I want you to dig deeper when people use Newspeak. I want you to fight conventional wisdom. Conventional wisdom might be shared by the masses but is not necessarily true. Use your own sense and reason.

So if somebody uses the term core competencies ask him what competence he really means, ask him what consumer benefits the competence provides, ask him why competitors cannot easily imitate the competency and ask him if the competency can be leveraged widely across many products and markets. If he can answer all these questions clearly, well than the competency is really a core competence that is valuable and that should be nurtured and protected.

Our world of business model innovation is also full of words that many of us use meaninglessly. Business model in itself is such a word. We argue in strategies that we offer a great value proposition to our customers. And, of course, we are so unique. But is that the reality? Are the customers well acquainted with our unique business model or is it a great strategy plan we want to execute or is it just fiction with no support from reality?

Be cruel to yourself, the market is much harder!

Get real! Do not mix marketing talk with strategy!

Please, do not mix marketing talk with strategy. Marketing can be about pretending. Strategy and business modeling is not about pretending or self-denial. Strategy must be clear in language and free of Newspeak. The best is not to use words that are prone to Newspeak. The best way of getting a great business model is to answer simple questions with honesty and modesty:

• What job do you solve for your customers? What value or benefit do you offer to your customers? What excites your customers?
• How do you create the benefit/ value/ excitement for your customers?
• And how do you earn money with your business?

So the first question is about the value proposition (great example here), the second is the value architecture and the third is the revenue model. Simple! So simple is the definition of a business model. And below you find the business model canvas to describe your own business.

The business model canvas by Patrick Stähler

If you want to print the canvas, you find the pdf of the Business Model Canvas here.

And if you answer e.g. that your value proposition is to offer the best service in the industry, you have to be honest about your core competencies. Do they really support the best service? And don’t forget the culture. Do you have the right values and corporate culture to support the value proposition?

And please, do not claim that you are the lowest cost-provider with the best service. I won’t believe you unless you have a great value architecture to support that claim, but even then I would be skeptical because that would be a real disruptive business model innovation and they happen to happen rather seldom.

And please remember a great strategy is not something what looks great on a piece of paper. A great strategy what works in reality!

(photo: http://www.flickr.com/photos/duncan/ / CC BY-NC 2.0)

Very interesting question in particular since most researchers including myself are still using case studies to make our point.

What made the discussion even more interesting was that we discussed what a business model is. There are several technical definitions like mine but for us more interesting was why the term became so prominent in the last years. With the term business model the word business returned to prominence in the conversation on strategy.

In strategic management the classical unit of research is the business unit, the industry in which a business unit is competing and the corporation which is the legal entity of most business units (Bettis 1998: 357). On the basis of these units of analysis researchers try to evaluate why certain companies have higher profits than other, comparable companies.

While researchers all try to find new units of analysis like clusters of firms, value nets, value webs or inter organizational systems, the real world was very pragmatic and uses more and more the term business (model). For managers and entrepreneurs the business became the locus of competition and of strategy.

Business model as the answer?

One of the reasons why the term business model has became popular is that people want to answer the question about the purpose of their business. This question was raised by Peter Drucker, a management philosopher and thinker.  He made the point that making profit – very often mentioned as the purpose of a firm – “is not only false, it is irrelevant.” and may even be harmful

Profit-making is not the purpose, but the test if the purpose of the business works. For Drucker “there is only valid definition of business purpose: to create a customer.” And you get your customers only if you do a job they need, you fulfill a want they have.

Business model describes the meaning of your endeavor

When you define your business via the value proposition you offer to your customers that is exactly the bridge between your company’s purpose and the need and wants of your customers. In a philosophical way the business model is a vehicle for the meaning of your endeavor.  And that meaning drives the employees, the management and the customers of the firm.

References

Bettis , R.A. (1998). “Commentary on “Redefining Industry Structure for the Information Age” by J.L. Sampler”, Strategic Management Journal, Vol. 19, p. 357-361.