Business Models
Evolution of Business Models:
From Early 20th Century to Today – a Critical Analysis
Business models continue to grow in complexity and the level of integrative processes that are knowledge and intelligence-based. From the relatively simple production-based business models of the 1900s and early 20th century to the highly orchestrated, knowledge-based business models of Toyota to support their global production and supply chain system (Dyer, Nobeoka, 2000) or Google with its world-class advertising business model (Pynnonen, Hallikas, Ritala, 2012), information and intelligence have replaced manufacturing power. The intent of this analysis is to evaluate the evolution of business models from the 1990s to today, with specific attention paid to their progression from time-and-motion-based production to highly integrated knowedlge networks that seek economics of scale with information. These latter chases of business models have shifted the focus of entire industries away from a myopic, inward-centric concentration on production metrics to instead put the customer at the center of the business (Pynnonen, Hallikas, Ritala, 2012). Google credits its success with advertising and the myriad of other businesses it is in my concentrating on innovating around the customer first, including both businesses and consumers in that definition (Cagliano, Caniato, Spina, 2005). A business model it is purest form is a taxonomy of how an entity intends to deliver value to its customers (Kujala, Kujala, Turkulainen, Artto, Aaltonen, Wikstrom, 2011). The core comportments of a business model are first defined in this analysis followed by an overview of the historical progression of models through today. Following the historical analysis will be a comparative table illustrating the similarities and differences of each dominant type of business model.
The Foundational Elements of a Business Model
At their most basic, a business model is a taxonomy that defines how an entity will add value to customers through the transformation of materials, resources, expertise and knowledge. Studies of business models indicate taxonomies over time reflect the relative complexity of markets they serve and the broadening base of customer expectations they must meet to succeed (Rebelo, 2005). The core elements any business model needs to be complete include a definition of the business’ core capabilities; customer value proposition including a clear statement of how the company is different than competitors; a clear definition of the target customer; clarity of the revenue and pricing model; distribution channel definition; partnership strategies and cost structure clarity (Linder, Cantrell, 2001) (Porter, 1986) (Weill, Vitale, 2002). From the initial business models that were entirely based on production efficiency and driving down per unit costs through economies and scale and heavy reliance on the build-to-inventory business model to the highly complex yet very agile business models of mass customization (Pynnonen, Hallikas, Ritala, 2012) business models have had to strive for agility to keep a business alive.
Analysis of the Historical Progression of Business Models
The initial business models of the 1900s were more oriented towards manufacturing efficiency and build-to-inventory with little focus on the customer and their unique requirements (Pensieroso, 2011). The rise of Alfred P. Sloan as GM of General Motors during the early 20th century was a direct result of how well he understood production efficiency-based business models and his strong-minded focus on determining Return on Investment (ROI) of each manufacturing operation (Rebelo, 2005). Sloan in essence became one of the leading executive evangelists for build-to-inventory production techniques. Sloan also pioneered the idea of a business model that could support highly segmented product lines as GM evolved into under his direction (Pensieroso, 2011).
Sloan had set the foundation for a revolution in business models that would occur in the mid- and late decades of the twentieth century. It was clear that the traditional build-to-inventory and build-to-stock business models, even with his invention of advanced financial metrics including ROI and Return on Assets (ROA), would scale to a level of profitability necessary to deal with the extreme economic fluctuations of the American economy (Pensieroso, 2011). Sloan and his contemporaries through the 1940s and 50s began experimenting with multi-project-based business models that were also designed to be agile enough to support multistage and multidivisional requirements (Wikstrom, Artto, Kujala, Soderlund, 2010). Lessons learned during the second world wars’ production runs regarding economies of scale, more agile-based approach to specialization of labor, and a focus on lean manufacturing began to quickly evolve (Mitchell, 2005). As the U.S. And global economy enjoyed significantly economic growth during this time period, the need for agility and quickness of customization in business models wasn’t required; the economy was sustaining businesses that exceled at delivering quality products with little to no major customization available to customers (Teece, 2010).
In the mid 1970s Dr. Michael Porter began work on the value chain, a business model concept hat would galvanize entire industries and provide a very clear link back to the financial metrics that Alfred P. Sloan has defined as critical including Return on Invested Capital (ROIC) (Porter, 1986). By the 1980s, value chain-based business models became dominant based on the manufacturing expertise and cost advantages of offshore producers that combined their business models with North American distribution and marketing organizations (Porter, 1986). Value chain-based business models also are responsible for the growth of the semiconductor, high tech componentry and many sectors of the high technology industry, as Japanese and Asian manufacturers embraced and extended many aspects of this framework (Porter, 2001). The ROIC-based extensions of this model has given companies based on this framework significant competitive advantage during an era when production efficiency and competing on lowering production costs was critical to market penetration
(Rebelo, 2005).
The next generation of business models shifted from being production-centric and focused on efficiency to placing insight, intelligence and knowledge of the customer at the center (Rebelo, 2005). Corporations’ business models had grown extremely large, complex, and cumbersome and lacked the agility necessary to respond quickly to customers’ unique requirements and requests. This led one management theorists to state that the existing business models of corporations had excelled so well at minimizing and mitigating risk (Shi, Manning, 2009) that they had forgotten hwo to serve the customer (Hamel, 2011). The era of the knowledge-enabled business model had begun. This era was marked by the strategic use of knowedlge and information, both within and outside the company. The Toyota Production System (TPS) and their high performance knowledge-sharing network is a case in point (Dyer, Nobeoka, 2000). This network allowed for suppliers external to Toyota to gain insights into customer forecasts in real-time and also plan their own production runs. The high performance knowledge sharing network business model also set the foundation for process re-engineering-based business models that took the concept of knowedlge engineering the next logical step and began redesigning entire workflows throughout corporations (Hamel, 2011). With the added speed and performance of processes that had been completely redesigned from the ground up, the next generation of business models predicated on e-business (Porter, 2001), the e-business design network (Cagliano, Caniato, Spina, 2005) and business model design with multi-model management (Wirtz, Schilke, Ullrich, 2010) organizations were finally able to attain a higher level of agility, customer focus, and the ability to customize products and services in real-time to customer requirements (Pynnonen, Hallikas, Ritala, 2012). In this latest phase of business models the orientation has changed to reflect more of a market- and customer-driven set of priorities that permeate the entire value chain of a business. These changes have also re-architected the traditional value chain as originally defined by Dr. Porter (Porter, 1986) nearly three decades ago. No longer static and highly regimented as Dr. Porter initially envisioned it, today’s value chains are much more fluid and demand-driven, concentrating on the customer experience and potential to provide a highly customized experience. This latest generation of business models has provided the foundation for entirely new businesses unforeseen even a decade ago, which signals this is an area of rapid change in new venture development (Kujala, Kujala, Turkulainen, Artto, Aaltonen, Wikstrom, 2011).
Comparative Analysis of Business Models
Business Model
Common Characteristics
Differences
Comments
Build-to-Inventory
Build-to-Stock
Highly structured, inflexible approach; values stability and doesn’t deal well with customer-driven change
Comparable to project-based business models in the multiproject and multidivisional structures
Very inflexible business model that put the core focus of activity on internally generated metrics
Multiproject, Multistage, Multi-Divisional Models
Legacy support from the Build-to-Inventory Model; comparable to value chain model in terms of Manufacturing Resource Planning)
Unique approach to project-based manufacturing; nascent design for knowledge-sharing model, strengthened by value chain business model phase
Outgrowth of the 2nd World War and division of labor practices being seen as critical to business model success; still lacked agility
The Era of the Value Chain-based Business Model
Dr. Porter’s revolutionary (at the time) model that shows the division of functional areas to those that directly deliver profit; fits well into multiproject-based business models
Unique in defining the division of labor by functional areas; never been done before
Immediately accepted as division of labor set the foundation for its acceptance; proven to deliver profitability
High Performance Knowledge Sharing Network
Most ambitious business model of all as it centers on information sharing across an extended enterprise
Highly differentiated and unique from any other business model — never before seen at this scale
Made the transition to a knowledge-driven economy possible
Process Re-Engineering Business Model
Capitalized on the gains made in the value chain and knowledge-based models by redefining processes
Brought measures of performance to processes’ first time this was done
Highly controversial because it favored layoffs to achieved ROI once processes were trimmed; very popular during the dotcom boom and bust years
E-Business Model (Porter, 2001)
Expansion of the traditional value chain model specifically tailored to supply chain consortiums and e-business-based models
Porter brought a focus on ROIC and ranking of opportunity by area to his previous model
Transitional business model that was made popular by venture capitalists in the early 2000 — 07 timeframe
E-Business Design Value Network
Expansion of the concepts in the knowledge sharing model to include additional suppliers and buyers
Emerged as a hub for the development of supplier networks and buyer consortiums
Eventually became a business model with a strong vertical market focus
Business Model Design and Multi-Model Management with social media and Web 2.0 technologies ((Wirtz, Schilke, Ullrich, 2010)
Heavily reliant on a broad range of integration points throughout an enterprise, creating a real-time information network using collaboration technologies including Facebook-like applications (Salesforce.com Chatter)
Comparable in design objectives to the structure of the knowedlge-sharing ecosystem; yet this business model is based on real-time social media data and collaboration
Ideal for large, knowledge-based businesses that are growing rapidly; perfect fit for new business ventures based on consulting and subject matter expertise
Conclusion
The progression of business models has been from those initially focused on the internal needs of a company to the expectations, preferences, wants and needs of customers. Compounding this transition has been the need for providing customers with highly customized products and experiences (Pynnonen, Hallikas, Ritala, 2012). These factors have been taken into account in the analysis of the core business models that have dominated the global economic landscape from 1900 to today. The business model of today’s key features are defined earlier in this analysis, in addition to showing how agility and responsiveness have won out over rigidity and cost reductions over time. The need for creating business models that stay in step with customers’ expectations and needs have never been greater as businesses face greater uncertainty and risk in their core markets than ever before.
References
Cagliano, R., Caniato, F., & Spina, G. (2005). E-business strategy: How companies are shaping their supply chain through the internet. International Journal of Operations & Production Management, 25(12), 1309-1327.
Dyer, J.H., & Nobeoka, K. (2000). Creating and managing a high-performance knowledge-sharing network: The toyota case. Strategic Management Journal, 21(3), 345-367.
Hamel, G. (2011). Extreme makeover. Leadership Excellence, 28(1), 3-4.
Hearle, J.W.S. (2004). The challenge of changing from empirical craft to engineering design. International Journal of Clothing Science and Technology, 16(1), 141-152.
Kujala, S., Kujala, J., Turkulainen, V., Artto, K., Aaltonen, P., & Wikstrom, K. (2011). Factors influencing the choice of solution-specific business models. International Journal of Project Management, 29(8), 960.
Linder, J.C., & Cantrell, S. (2001). Five business-model myths that hold companies back. Strategy & Leadership, 29(6), 13-18.
Mitchell, M.F. (2005). Specialization and the skill premium in the 20th century*. International Economic Review, 46(3), 935-955.
Pensieroso, L. (2011). Real business cycle models of the great depression. Cliometrica, 5(2), 101-119.
Porter, M.E. (2001, Strategy and the internet. Harvard Business Review, 79, 63-78.
Porter, M.E. (1986). Changing patterns of international competition. California Management Review, 28(2), 9-9.
Pynnonen, M., Hallikas, J., & Ritala, P. (2012). Managing customer-driven business model innovation. International Journal of Innovation Management, 16(4), 1.
Rebelo, S. (2005). Real business cycle models: Past, present and future. The Scandinavian Journal of Economics, 107(2), 217-238.
Shi, Y., & Manning, T. (2009). Understanding business models and business model risks. The Journal of Private Equity, 12(2), 49-59.
Teece, D.J. (2010). Business models, business strategy and innovation. Long-Range Planning, 43(2), 172.
Weill, P., & Vitale, M. (2002). What it infrastructure capabilities are needed to implement e-business models? MIS Quarterly, 1(1), 17-17.
Wikstrom, K., Artto, K., Kujala, J., & Soderlund, J. (2010). Business models in project business. International Journal of Project Management, 28(8), 832.
Wirtz, B.W., Schilke, O., & Ullrich, S. (2010). Strategic development of business models: Implications of the web 2.0 for creating value on the internet. Long-Range Planning, 43(2), 272.
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