(Ruefli et al., 2000),(Vilmos et al., 2006),(Walker et al., 2002), but see some differing opinions in ( Hawawini et al., 2003),(Hawawini et al., 2005), (McNamara et al., 2005). There is also an important branch of the empirical literature that argues that it is persistence that is important, and on this measure industry effects dominate(e.g,(Denrell, 2004), (McGahan et al, 1999),(McGahan et al., 1999)) We depart from this firm versus industry debate by testing if the concept of business model might also substantively explain performance heterogeneity. The concept of business model is motivated by its common usage by business people, although, as we will show, it is also consistent with a number of theoretical antecedent When IBM CEO Louis Gerstner gave his 2001 annual analyst address about the companys new strategic initiatives, he concluded that the strategy"makes more sense given the current business environment and IBM's business model. (2001). This reference to business model is not unique to IBM Is pervasive 1. As an alleged source of success-Dell's business model stands head and shoulders above its competitors. ((Gurley, 2001)and the root of failures-IBMs] PC division had a business odel problem. ""((Spooner, 2002) Among both information technology firms and industrial ones(Bair, 2003)reports that"along with creating a new airplane [the new Boeing 7E7], we're creating a new business model for our industry From the way we involve suppliers 3. In big business annual reports-the"GE Business Model in(Welch, 2003and among analysts, venture capitalists and consultant Despite wide-spread use in the industry, the idea of a"business model"is rarely studied in academic research, except for some pioneering research focused on e-businesses(Amit et al., 2001). This lack of progress could be due to many difficulties in executing a rigorous study of business models. First, there appear to be diverse views on what a business model is. Table I summarizes some of these. Some authors define business model as something firms have. others as something that firms have in relation to other firms in a network. Some authors classify business models by type of transaction(e. g, franchising
4 (Ruefli et al., 2000), (Vilmos et al., 2006), (Walker et al., 2002), but see some differing opinions in (Hawawini et al., 2003), (Hawawini et al., 2005), (McNamara et al., 2005)). There is also an important branch of the empirical literature that argues that it is persistence that is important, and on this measure, industry effects dominate (e.g., (Denrell, 2004), (McGahan et al., 1999), (McGahan et al., 1999)). We depart from this firm versus industry debate by testing if the concept of business model might also substantively explain performance heterogeneity. The concept of business model is motivated by its common usage by business people, although, as we will show, it is also consistent with a number of theoretical antecedents. When IBM CEO Louis Gerstner gave his 2001 annual analyst address about the company’s new strategic initiatives, he concluded that the strategy “makes more sense given the current business environment and IBM's business model.”(2001). This reference to business model is not unique to IBM. It is pervasive: 1. As an alleged source of success–“Dell's business model stands head and shoulders above its competitors'.” ((Gurley, 2001))––and the root of failures––“[IBM’s] PC division ‘had a business model problem.’” ((Spooner, 2002)) 2. Among both information technology firms and industrial ones––(Bair, 2003) reports that “along with creating a new airplane [the new Boeing 7E7], we're creating a new business model for our industry. From the way we involve suppliers.” 3. In big business annual reports––the “GE Business Model” in (Welch, 2003)––and among analysts, venture capitalists, and consultants. Despite wide-spread use in the industry, the idea of a “business model” is rarely studied in academic research, except for some pioneering research focused on e-businesses (Amit et al., 2001). This lack of progress could be due to many difficulties in executing a rigorous study of business models. First, there appear to be diverse views on what a business model is. Table 1 summarizes some of these. Some authors define business model as something firms have, others as something that firms have in relation to other firms in a network. Some authors classify business models by type of transaction (e.g., franchising
leasing, one-time sales, and sales-plus-annual-maintenance) and others by type of product or service sold (e.g, should an online search engine sell search services embedded in other websites, or sell advertising space? ) Even if a convergent definition is obtainable, a second difficulty is to show that it has discriminant validity--is it sufficiently different from related concepts such as industry classification? Third, there is another challenge of obtaining data. Datasets on firms are commonly classified by industry and its various derivations, such as"line of business"or segment. It is extraordinarily difficult to collect data on any meaningful definition of business model. Large-scale surveys of firms are possibl but are subject to self-reporting errors In the next section, we propose a simple definition of business model that captures the essence of many definitions proposed, and is also consistent with antecedent literature. In later sections on empirics we describe how our definition has discriminant validity and how we obtain data on business models 3. DEFINING BUSINESS MODELS At the broadest level, a business model may be defined as how businesses appropriate the maximum value of the products or services they have created. This, of course, is not the only definition possible For example, (Amit et aL., 2001)define business models mainly on the dimension of how value is created We settle on value appropriation because this is the essence among the practitioner definitions in table 1 It also has strong theoretical antecedents, described below The bulk of this section describes our proposed definition of business model. It is a typological definition, based on two dimensions. One dimension is the type of assets involved-i. e, what products or services have been created for appropriation. We distinguish among four important asset types physical, financial, intangible, and human. The second dimension is type of rights being sold-i. e, how value is appropriated. We consider four types of asset rights: Creator, Distributor, Landlord, and Broker These two dimensions lead to sixteen business models. Examples are in Table 2. In our judgment, this typological definition fits important criteria, such as parsimony, being mutually exclusive and collectively exhaustive, and has a good fit with intuition. We provide only a summary here; details of these are
5 leasing, one-time sales, and sales-plus-annual-maintenance) and others by type of product or service sold (e.g., should an online search engine sell search services embedded in other websites, or sell advertising space?). Even if a convergent definition is obtainable, a second difficulty is to show that it has discriminant validity––is it sufficiently different from related concepts such as industry classification? Third, there is another challenge of obtaining data. Datasets on firms are commonly classified by industry and its various derivations, such as “line of business” or segment. It is extraordinarily difficult to collect data on any meaningful definition of “business model.” Large-scale surveys of firms are possible, but are subject to self-reporting errors. In the next section, we propose a simple definition of business model that captures the essence of many definitions proposed, and is also consistent with antecedent literature. In later sections on empirics, we describe how our definition has discriminant validity, and how we obtain data on business models. 3. DEFINING BUSINESS MODELS At the broadest level, a business model may be defined as how businesses appropriate the maximum value of the products or services they have created. This, of course, is not the only definition possible. For example, (Amit et al., 2001) define business models mainly on the dimension of how value is created. We settle on value appropriation because this is the essence among the practitioner definitions in Table 1. It also has strong theoretical antecedents, described below. The bulk of this section describes our proposed definition of business model. It is a typological definition, based on two dimensions. One dimension is the type of assets involved––i.e., what products or services have been created for appropriation. We distinguish among four important asset types: physical, financial, intangible, and human. The second dimension is type of rights being sold––i.e., how value is appropriated. We consider four types of asset rights: Creator, Distributor, Landlord, and Broker. These two dimensions lead to sixteen business models. Examples are in Table 2. In our judgment, this typological definition fits important criteria, such as parsimony, being mutually exclusive and collectively exhaustive, and has a good fit with intuition. We provide only a summary here; details of these are in
(Weill et al., 2004) 3. 1. What assets are involved? Our first dimension is simply what assets are involved in value appropriation. We consider four types of assets: physical, financial, intangible, and human. These are commonly referred to in the literature often as components of a resource-based view or some core competence. For example, (Teece et al. 1997) list as their"positions"financial assets and intangible assets, into which they group what they call technological, complementary and reputational assets. There is also a large literature that describes the differences among these asset types, and how the economy is shifting its weight on one to another-e g (Quah, 2002) (Rajan et al, 1998); (Varian, 2000) Physical assets include durable items(such as houses, computers, and machine tools) as well as endurable ones(such as food, clothing, and paper) Financial assets include cash and securities like stocks, bonds, and insurance policies that give their owners rights to potential future cash flows Intangible assets include legally protected intellectual property(such as patents, copyrights, and trade secrets), as well as other intangible assets like knowledge, goodwill, and brand image Human assets include people's time and effort. People are not"assets"in an accounting sense and annot be bought and sold, but their time(and knowledge)can be "rented out for a fee 3.2. What righ ts are belng sold? The first, and most obvious, kind of right a business can sell is the right of ownership of an asset Customers who buy the right of ownership of an asset have the continuing right to use the asset (almost) any way they want, including selling, destroying, or disposing of it. In the property rights literature, this is idea that the seller of an asset transfers residual rights to the buyer-e g,( Grossman et aL., 1986) and(Mahoney, 1992). Furthermore, we distinguish between sales that involve significantly transformed assets from those that do not This allows us to distinguish between firms that make what they sell (like manufacturers)and those that sell things other firms have made(like retailers). We could
6 (Weill et al., 2004). 3.1. What assets are involved? Our first dimension is simply what assets are involved in value appropriation. We consider four types of assets: physical, financial, intangible, and human. These are commonly referred to in the literature, often as components of a resource-based view or some core competence. For example, (Teece et al., 1997) list as their “positions” financial assets and intangible assets, into which they group what they call technological, complementary and reputational assets. There is also a large literature that describes the differences among these asset types, and how the economy is shifting its weight on one to another––e.g., (Quah, 2002); (Rajan et al., 1998); (Varian, 2000). Physical assets include durable items (such as houses, computers, and machine tools) as well as nondurable ones (such as food, clothing, and paper). Financial assets include cash and securities like stocks, bonds, and insurance policies that give their owners rights to potential future cash flows. Intangible assets include legally protected intellectual property (such as patents, copyrights, and trade secrets), as well as other intangible assets like knowledge, goodwill, and brand image. Human assets include people’s time and effort. People are not “assets” in an accounting sense and cannot be bought and sold, but their time (and knowledge) can be “rented out” for a fee. 3.2. What rights are being sold? The first, and most obvious, kind of right a business can sell is the right of ownership of an asset. Customers who buy the right of ownership of an asset have the continuing right to use the asset in (almost) any way they want, including selling, destroying, or disposing of it. In the property rights literature, this is idea that the seller of an asset transfers residual rights to the buyer––e.g., (Grossman et al., 1986) and (Mahoney, 1992). Furthermore, we distinguish between sales that involve significantly transformed assets from those that do not. This allows us to distinguish between firms that make what they sell (like manufacturers) and those that sell things other firms have made (like retailers). We could
have ignored this distinction and have only one model(called, for example, " Seller") including all firms selling ownership rights. But if we had done so, the vast majority of all firms in the economy would have been in this category, and we would have lost an important conceptual distinction between two very different kinds of asset rights models: creators and distributors A Creator buys raw materials or components from suppliers and then transforms or assembles them to create a product sold to buyers. This is the predominant business model in manufacturing. A key distinction between Creators and Distributors is that Creators design the products they sell. We classify a firm as a Creator, even if it out-sources all the physical manufacturing of its product, as long as it does substantial design of the product A Distributor buys a product and resells essentially the same product to someone else. The Distributor usually provides additional value by, for example, transporting or repackaging the product, or by providing customer service. This business model is ubiquitous in wholesale and retail trade We now turn to the second obvious kind of right a business can sell: the right to use an asset, such as a car or a hotel room. Customers buy the right to use the asset in certain ways for a certain period of time but the owner of the asset retains ownership and can restrict the ways a customers use the asset. And, at the end of the time period, rights revert to the owner. As an example from theory,(Coase, 1972) conjectures that a durable good monopoly can appropriate more value if it leases it rather than sells it The intuition is straightforward: having sold its good, a monopolist is tempted to undercut himself in the future second-hand market, whereas a monopolist that leases its good is still in control of its market and does not suffer the same temptation. This motivates our third type of model: Landlord A Landlord sells the right to use, but not own, an asset for a specified period of time. Using the word landlord" in a more general sense than its ordinary English meaning, we define this basic business model to include not only physical landlords who provide temporary use of physical assets (like houses, airline seats and hotel rooms), but also lenders who provide temporary use of financial assets (like money ) and contractors and consultants who provide services produced by temporary use of human assets. This asset ights model highlights a deep similarity among superficially different kinds of business: All these
7 have ignored this distinction and have only one model (called, for example, “Seller”) including all firms selling ownership rights. But if we had done so, the vast majority of all firms in the economy would have been in this category, and we would have lost an important conceptual distinction between two very different kinds of asset rights models: creators and distributors. A Creator buys raw materials or components from suppliers and then transforms or assembles them to create a product sold to buyers. This is the predominant business model in manufacturing. A key distinction between Creators and Distributors is that Creators design the products they sell. We classify a firm as a Creator, even if it out-sources all the physical manufacturing of its product, as long as it does substantial design of the product. A Distributor buys a product and resells essentially the same product to someone else. The Distributor usually provides additional value by, for example, transporting or repackaging the product, or by providing customer service. This business model is ubiquitous in wholesale and retail trade. We now turn to the second obvious kind of right a business can sell: the right to use an asset, such as a car or a hotel room. Customers buy the right to use the asset in certain ways for a certain period of time, but the owner of the asset retains ownership and can restrict the ways a customers use the asset. And, at the end of the time period, rights revert to the owner. As an example from theory, (Coase, 1972) conjectures that a durable good monopoly can appropriate more value if it leases it rather than sells it. The intuition is straightforward: having sold its good, a monopolist is tempted to undercut himself in the future second-hand market, whereas a monopolist that leases its good is still in control of its market and does not suffer the same temptation. This motivates our third type of model: Landlord. A Landlord sells the right to use, but not own, an asset for a specified period of time. Using the word “landlord” in a more general sense than its ordinary English meaning, we define this basic business model to include not only physical landlords who provide temporary use of physical assets (like houses, airline seats and hotel rooms), but also lenders who provide temporary use of financial assets (like money), and contractors and consultants who provide services produced by temporary use of human assets. This asset rights model highlights a deep similarity among superficially different kinds of business: All these
usinesses sell the right to make temporary use of their assets Finally, there is one other less obvious-but important--kind of right a business can sell. This is the ght to be matched with potential buyers or sellers of something. A home seller, for instance, may sign an agent contract with a real estate broker. Thereafter, the broker works to find buyers, who in turn must not bypass the broker to seal a transaction directly with the home seller. In short, the broker sells the right to be matched with potential buyers or sellers of real estate. There is a very large literature on intermediation, including different types of intermediators such as brokers, dealers, and market-makers (see( Rust et al, 2003) for a recent exposition). Taken together, we call this fourth type Broker A Broker facilitates sales by matching potential buyers and sellers. Unlike a Distributor, a Broker does not take ownership of the product being sold. Instead, the broker receives a fee(or commission) from the buyer. the seller. or both 'e make two final notes. First, in deriving the above, we have considered other ways in which asset rights could be involved in value appropriation, and are satisfied that our framework is the most appropriate. For example, a distinction often used by practitioners when talking about business models is that of how firms charge. ( Grossman et al, 1986) provide the example of why it does not matter whether an insurance firm calls its agents"commissioned employees"or independent agents. What is important is whether the insurance firm or the agent owns residual rights to critical assets, such as the list of clients Our second note is that, for expositional simplicity, we describe the above in terms of physical products but our descriptions apply to non-physical assets, too 3.3. The Sixteen Business model As Table 2 shows, each of the asset rights models can be used(at least in principle) with each of the asset types. While all of the models are logically possible, some are quite rare, and two(Human Creator and Human Distributor)are illegal in most places today Many of the models can be mapped into commonly understood ones. For example, Physical Creator is mapped into manufacturers. A few are less obvious
8 businesses sell the right to make temporary use of their assets. Finally, there is one other less obvious—but important—kind of right a business can sell. This is the right to be matched with potential buyers or sellers of something. A home seller, for instance, may sign an agent contract with a real estate broker. Thereafter, the broker works to find buyers, who in turn must not bypass the broker to seal a transaction directly with the home seller. In short, the broker sells the right to be matched with potential buyers or sellers of real estate. There is a very large literature on intermediation, including different types of intermediators such as brokers, dealers, and market-makers (see (Rust et al., 2003) for a recent exposition). Taken together, we call this fourth type Broker. A Broker facilitates sales by matching potential buyers and sellers. Unlike a Distributor, a Broker does not take ownership of the product being sold. Instead, the Broker receives a fee (or commission) from the buyer, the seller, or both. We make two final notes. First, in deriving the above, we have considered other ways in which asset rights could be involved in value appropriation, and are satisfied that our framework is the most appropriate. For example, a distinction often used by practitioners when talking about business models is that of how firms charge. (Grossman et al., 1986) provide the example of why it does not matter whether an insurance firm calls its agents “commissioned employees” or “independent agents.” What is important is whether the insurance firm or the agent owns residual rights to critical assets, such as the list of clients. Our second note is that, for expositional simplicity, we describe the above in terms of physical products, but our descriptions apply to non-physical assets, too. 3.3. The Sixteen Business Model As Table 2 shows, each of the asset rights models can be used (at least in principle) with each of the asset types. While all of the models are logically possible, some are quite rare, and two (Human Creator and Human Distributor) are illegal in most places today. Many of the models can be mapped into commonly understood ones. For example, Physical Creator is mapped into manufacturers. A few are less obvious: