1 The emergence of the business model idea

In Video 1, Professor Baden-Fuller talks about the reason why business model literature has become so popular, and not just among academics. He also introduces you to the different possible definitions of business models.

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Transcript: Video 1 Definition of business models

CHARLES BADEN-FULLER:

The word business model is commonly used by many people in many situations. You hear it on television when people ask would be entrepreneurs, what is your business model? People talk about it about businesses. People even talk it about life. So what is a business model?

A business model simply asks the question, how do you create value and how do you capture that value? Let me explain why we are asking that question of what it means. Until quite recently, that is before the digital age, it was clear that almost all firms had a very simple business model called the product business model. Now, the product business model is not about whether you sell products, because it also includes services. It's about the idea that you design something, you make it, or you produce it. The customer comes and collects it or uses it. And the customer pays for that product or service.

And typically, they take away the product or service and use it themselves separately from the producer. So the producer is really engaged in the production and delivery of the product and service. And then collects the money. In this simple thing, the customer pays for the product. The digital age has changed this business model in the sense that it's changed how we might charge and how we might separate the charging and the production of goods. Think about Wikipedia.

Everyone uses Wikipedia. It's an online encyclopaedia that's free. Wikipedia competes with the Encyclopaedia Britannica, which originally started life as a multi-volume product which you bought a set of volumes and had the information in it. Difference between the Encyclopaedia Britannica and Wikipedia is Encyclopaedia Britannica, the customer who uses the volumes paid for them. In Wikipedia, you don't pay directly for Wikipedia services. You pay, perhaps, indirectly. Because Wikipedia as a foundation asked for gifts. And various other actors give Wikipedia money.

So you have here a very simple idea of the user, not necessarily being the paying customer, and there being another paying customer. Google is a very good example of this. You go online to search for the hotel or the restaurant. It's the restaurant or hotel who's paid for the advertisement that's curated by Google that's shown to you. You get to search for free. They pay on the hope that you come and buy their services. This is an example of a two-sided market.

So we see that with the digital world, the customer doesn't always pay. There might be another second set of customers who get other services who pay. We therefore have the idea of two different kinds of business models. One, where the customer is mainly paying for most if not all the service. And the other one where someone else is paying for some or all of the services.

A simple dichotomy between two kinds of business models, but very fundamental to understanding business. Let's go back to the term business model. It has two words in it, business and model. Many people think that business models are only about profit making businesses. But actually, not for profit businesses are businesses.

The charity is a business in the sense that someone has to pay for its operations. It has to earn revenues somewhere. Otherwise, it won't survive. So the word business model applies not just for profit making businesses, but also not for profit making businesses. Because they need a way to get revenues to pay for the services.

And this, of course, applies in the case of public authority businesses, such as a running of services. Someone has to pay for these services. It's often the taxpayer. So we need to think about the business models for other firms which are not necessarily privately owned. The same idea applies- who's paying for the service?

In the case of charities, typically there's a group of donors who's paying for the service for the needy. Therefore, it is in a sense a two-sided business model. One group of people who are getting benefits from the idea of supporting another group who are getting the services for free, or if not for free, at a very low cost. And in the case of an organisation like the NHS, the business model here is really very simple.

The government is a surrogate consumer. The government is paying the NHS for services that you get notionally for free, but it's paid for by the taxpayer. By the way, doesn't have a choice about whether they pay. So the government is a sort of quasi customer. And in this case if the hospital doesn't satisfy the customer, doesn't do what the government wants it to do, it won't get paid. So the idea of the business model applies just as much for not for profit businesses, for government owned businesses, and for charities.

End transcript: Video 1 Definition of business models

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Video 1 Definition of business models

The term ‘business model’ is equally applicable to private and public limited companies, but it is possible to see how most of the concepts associated with business models are applicable to organisations in the public and third sectors, as will be seen in the sections that follow.

According to an extensive literature review of 216 academic papers published between 1995 and 2016, three interpretations of the meaning and function of ‘business models’ have emerged from the management literature (Massa et al., 2017, p. 76):

1. business models as attributes of real firms having a direct real impact on business operations
2. business models as cognitive/linguistic schema
3. business models as conceptual representations/descriptions of how an organisation functions.

You will look at each of these in more detail in the following sections.