both sides, as does the “pay per click” advertising-based search by Google. By contrast, a pricing model (such as the “freemium” model adopted by Adobe, Skype, Myspace, and open source software companies to give basic service away for free and charge premium prices for value-added services) affects the revenue side.

The so-called Web 2.0 and cloud computing lie on this continuum in the potential development of new business models, addressing both sides. On the cost side, cloud computing removes the need to invest up front in expensive servers, thus turning capital expenditure into operational expenses and lowering barriers to entry. However, to turn various service models such as “infrastructure as a service” or “software as a service” into a business model, providers must work out the revenue side with the choice of a specific pricing policy and targeted customer segments. Without working out these dimensions, the money will not follow no matter how cool the technology.

illustration by MiChael austin

Business models in strategy Business strategists started to pay greater attention to the business model once its central focus on value creation became evident. In contrast to business process design at the operational level, a business model defines the overall business logic of a company at the strategic level. However, there are two ambiguities that, if resolved, would make the business model a more useful tool in strategy: first, what elements constitute a business model; and second, the extent to which business models can be planned in advance.

When we see a well-functioning business model in action, it is not difficult to see there are several components that fit into a coherent whole. In particular, a business model articulates the customer value proposition; it identifies a market segment; it defines the structure of the value chain; it specifies the revenue generation mechanisms; it describes the positioning within the value network or ecosystem; and it also elaborates on competitive strategy by which the firm gains and holds advantage over rivals. 1

For example, Apple, with its iPods, iTunes, iPhones, and iPads, provides a unique experience to consumers, by targeting the market segment that cares about style as well as performance. Apple has an outsourced positioning in the supply chain, has specified its revenue generation mechanisms that bundle products and services, and has created an ecosystem that includes telecom providers, music content providers, and other suppliers. Apple’s business model behaves like a platform as it attracts external companies to invest in activities that enhance its value.

Thus, business models are firm-cen-tric, but with a lot of thought that goes into their boundary-spanning function. The latter ensures the focal firm can rely on the resources and capabilities of third parties, and harness external technologies and ideas through “open business models.” 1

However, the first unhelpful dis-
agreement among strategists is on
how to bound the business model
concept. In particular, should the busi-
ness model focus on value creation or
also incorporate the notion of value
capture? Some argue that a business
model is about co-defining total value
creation—the overall size of the pie—
for all parties involved. How much of
the total pie the focal firm actually cap-
tures depends on its revenue model,
which should remain separate from its
business model. 5 By contrast, others
argue that a business model defines
both the “go to market” and “value
capturing” strategies. 4 In the latter, de-
signing and implementing a business
model is the essence of strategy. In
the former, a business model must be
combined with other things (a revenue
model, resources and capabilities, and
so forth) to constitute a good strategy.

 

Business model innovation Thus, business model can be a subject of innovation in itself, pursuing novel forms of value creation and captur-