The Relationship between Business Models, Theories and Techniques - Dissertation Example

The Relationship between Business Models, Theories and Techniques Critically assess the relationship between business models, theories and techniques, and the practical benefits and applications of such models. Introduction Business models, according to Chesbrough and Rosenbloom (2002), provides constructs that mediates the value creation process that exist between the technical and economic domains, choosing and filtering technologies, and then packaging them into specific configurations for the market (Chesbrough, A., Rosenbloom (R.S. 2002). However, Fisken and Rutherford (2002) simplifies the definition by saying a business model is an outline of how a company generates revenues with reference to the structure of its value chain (Fisken, J., Rutherford, J., 2002). A business model according to Hedman and Kalling (2002), is designed by articulating variables inclusive of, (a) industry, customers and competitors, b) product offering, (c) activities and organization, and (d) factor markets and suppliers (Hedman, J., Kalling, T., 2002). These variables are used to develop models which may be one or combinations of any of the following namely, value proposition, market segmentation and revenue generation, value chain, cost structure and profit potential, value network, and competitive strategy according to Rasmussen(2002). The literature that follows is based mostly on the work of Chesbrough and Rosenbloom, which according to Rasmussen (2002) is the only work of quality to date regarding the understanding of business models and how they are, developed (Rasmussen, B. 2002). Types of Models Value Proposition Model Value proposition orientated models, are those that express the nature of the product offering to selected markets based on innovation and the technology utilized. According to Rasmussen (2002), when technology is used to commercialize the innovation in a product, it lowers cost or creates new opportunities appropriate to the market segment that will generate value for the firm (Rasmussen, B., 2002). There are diverse ways new technology can be used to target specific markets, and businesses will be challenged to design value proposition models that will synergize with the innovation developed. According to Amit and Zott (2001), they also have to find the best revenue model to maximize the innovations in the products and services (Amit, R., Zott, C. 2001). There are cases where the technology, according to Rasmussen (2002), will have to be packaged into different size products and sold, or franchised to end users, or formulated into services which are then hired out at different price regimes (Rasmussen, B., 2002). Market Segmentation and Revenue Generation Model A business that strategically developed a market segmentation and revenue generation model according to Chesbrough and Rosenbloom (2002), seeks users to whom the technology associated with the product is useful and serve specific purposes, such that their uses will generate the revenue streams that will make the firms achieve profitability on a continuous basis (Chesbrough, A. Rosenbloom, R.S. 2002). The model according to Chesbrough and Rosenbloom (2002) is developed with the understanding that different segments of the market have different needs, and with the appropriate innovation, the potentials of the markets can be unlocked (Chesbrough, A., Rosenbloom, R.S., 2002). Value Chain Model Value Chain orientated models deals with firm’s positions and activities in their chains, and how it will capture part of the value that it create in the chain, according to Chesbrough and Rosenbloom (2002). The model according to Porter (1985), allows firms to embrace both the primary activities and the support activities to deliver values that will exceed the cost to produce the goods and or services, and thereby realized acceptable profits for the entities (Porter, M. 1985). Cost Structure and Profit Margins This model deals with how a firm generates revenues from sales, leasing, support, subscriptions, and other mediums, and the attendant cost within the value proposition, and value chain chosen (Rasmussen, B., 2002). Value Network Firms using the this function to develop models, look at how they are positioned with respect to suppliers, customers, as well as potential complementors and competitors, according to Rasmussen (2002). Competitive Strategy Model Gaining the appropriate percentage of the relational rent, is the main issue of any firm pursuing a competitive advantage model in the market, as it positions itself against the competition (Rasmussen, B. 2002). Competitive Strategy achieved by using the Resource Base View, Strategic Assets, Relational View, or Transactional Cost Economics will enable a firm to gain and maintain competitive advantage over its rivals according to Rasmussen (2002). Relevant Economic Theories Businesses that choose to pursue any of these models has to examine a total of nine theories to choose from to arrive at the most appropriate combinations that will enable them to achieve it market positions, revenue streams, as well as profitability. According to Rasmussen (2002), Resource Base View (RBV), Transaction Cost Economics, Complementary, Relational View, Dynamic Capabilities, Strategic Assets, Value Chain Analysis, or the Analysis of Appropriability Regime, constitute the economic theories that will drive the choice of the models firms will used to generate revenues and dominate market segments (Rasmussen, B. 2002). Resource Base View Theory This theory according to Wernefelt (1984), encompass a firm’s Value Proposition being used as its most valuable offering in connection to its strategic assets Wernefelt, B.1984). Relational View Firms seek here to not its own products but by forming alliances or net value work with other companies to deliver values to specific markets, so that it can generate projected profits that will ensure its competitiveness and viability in the chosen marketing environment, according to Dyer and Singh (1998). Complementary The theory behind this model informs a company how to decisively contemplate how to use other firm’s complementary assets to supplement its own product offering. Consideration has to be given to the power of the value chain of both firms as they intersect, and how the distribution strategies can be used to effectively deliver values to the consumers in the targeted markets (Teece, D. 1986). Competitive Advantage The theory on competitive advantage that Porter enunciate, seeks to optimize or better coordinate the linkages that exists between the firms value chain and the value chains other firms offers (Porter 1985).Opportunities for realignment of activities across boundaries exist, and can be optimized by skilful integration of firms value chains with that of suppliers or buyers (Porter, 1985). Transaction cost Economics Transaction Cost Economics theory within a model allows the owners to analyze the cost of providing goods or services through the market rather than from within the firm according to Coase (1937). They will look analytically at the search and information cost, the bargaining and decision cost, and the policing and enforcement cost to efficiently deliver the products and services needed by the consumer. Dynamic Capabilities The essence of Dynamic Capabilities Theory is that it empowers a firm to change its areas of competence to reflect the changes in the business environment, according to Rasmussen (2002), and such flexibility allows it to retain its position in pursuit of its goals and objectives. Value Chain Analysis In this analysis firms are informed how to use the values generated from primary activities like logistics inbound and outbound, operations, marketing, and sales, as well as primary support activities like the infrastructure of firms, human resource management, technology development, and procurements to deliver cost effective value to the target market (NetMBA, 2010). The value developed along the chain can then be tailored to fit cost advantage or product differentiation model, according to NetMBA (2010). Analysis of Appropriability Regime Teece (1986), sees this analysis as a methodology by which products are shared between firms, and those firms with strong Appropriability Regimes, are likely to gain high levels of economic shares, while those with less can address thee deficiency by using the model to effect changes that will help them improve their positions (Teece, 1986). Absorptive Capacity Theory This theory arms a firm to analyze the value of new and external information, assimilate, and then apply it to critically improve its capabilities (Cohen et al 1990). Strategic Assets The ownership of Strategic Assets by firms, gives them specific stock capabilities to compete against other firms for the acquisition of greater spaces, according to Amit and Shoemaker (1993). The more these resources are heterogeneously distributed, difficult to imitate, non transferrable, and are identified with the history of specific firms, the greater use they will find in the increasing the profit margins of these firms (Amit, R., Shoemaker, P., 1993). Analyses and Benefits Value Proposition Model A business that decides to focus on Value Proposition as its model can successfully embrace the Resource Base View, Relational View, and Appropriation Regime theories according to Rasmussen (2002), because they enable it to use its strategic assets, core competences, and avoid problems associated with the Appropriation of assets. The model will facilitate diverse range of products being offered to several segments of the market, and base on the portfolio of the distributions, can lead to a multiple of income streams on a continuous basis. Products and services can be marketed as unique to a specific market in one sense, and can be modified in terms of appearance and sizes and distributed in a different channel in alliance with a number of partners. Overtime, a position of dominance will be achieved , and companies can then according to Rasmussen (2002), use it to effect the Appropriability Regime, which infers that firms that has strong assets are likely to gain high economic shares (Rasmussen, 2002). The highest levels of profits can be demanded from the alliances network, due to the superior value offering, and the benefits it creates for those in the partnerships. A critical benefit value proposition delivers to firms is operable when there are changes in the environment that reduces the income generating capacity. The firms can leverage their positions to negate the effect of the market, and enable restoration to more acceptable income streams. This strategy may include price reduction, customer incentives strategies, give ways, contests, special advertizing and promotions and other activities that will renew interest in the products and services. Internally, companies can look at their support services and recruit higher quality human resource personnel, especially engineers, who can innovatively develop new technologies that will ensure lower production costs for the high valued goods being marketed, and this in turn will enable the benefits in terms of lower sales prices, to be passed on to the consumers. A lowering of sales prices will automatically lead to an increase in the demand levels for the products in the market, and simultaneous increases in revenue generations and profit levels. Transaction Cost Economics theory would have been inappropriate in this model, as the companies would have to incur additional cost pursuing search and information cost, bargaining and control, as well as policing and enforcement, which would lead to increase in the sales prices of the final products (Coase, 1937). They would also be guilty of not maximizing the potentials of their strategic assets, which are invaluable in very competitive markets, and continuation of these activities would eventually lead to sub-optimization in vital operational areas. Similarly, Value Chain Analyses theory would not advance the profitability of the model, in that this theory works exceptionally well in the application of vertical integration, and companies would have to look at their primary activities, support activities, as well as customers to facilitate the application of the theory. Such acts run counter to the virtues of the relational view and the Appropriability theories, and may be too time consuming and lead returns less than expected, thereby incurring unnecessary cost on the firms operations, as well as poor use of its economic resources. Dynamic Capabilities as well as Absorptive Capacity would limit the firm’s ability to maximize the use of its strategic assets, in addition to negotiate with its alliances from a dominant position. Companies that are in weaker positions, and lacks defining strategic assets, would be more appropriate to employ these two theories. This is due to the fact Dynamic Capabilities serves to improve firm’s competence by making internal and external adjustment, while absorptive capacity theory is applicable when firms need to increase their capacities to effect successful alliances. In contrast, companies with strategic assets have no lack in these areas, and are able to use their positions of dominance to attract alliances. Dell Computer exemplifies what companies can achieve by embracing the Value Proposition in its model during the 1990’s. The company according to Corporate Views (2008), bypassed the production, warehousing and distribution aspects of giants Microsoft and HP, and developed a direct marketing strategy that delivers PC directly to customers on the basis of how and when they wanted, and at a price much lower than its rivals (Corporate Views, 2008). Dell Computer through this strategy gave prominence to the just-in-time model strategy which reduces warehousing, manufacturing, advertizing, and other costs, and went on to deliver PC of high values that enable the company to become one of the premier supplier on the global market (Corporate Views, 2008) Market Segmentation and Revenue Generation Model Firms that are intent on using this model can succeed by embracing the relevant theories of Resource Base View, and Relational View according to Rasmussen (2002). It is somewhat similar to the Value Proposition, in that a company can gain maximum economic share of the relational rents, and innovation is a key component in the determination of how the products and services are marketed to each segment. Research and Development are employed to design products for each segment of the market in which firms chose to deploy low either low pricing, product differentiation, or niche marketing strategies to deliver products that will meet the needs of customers. The model differs from Value Proposition in that companies are able to look in more than one market segments, and compare what the competitors are offering in comparison to its own, and then innovatively deliver products at competitive prices, compare to the inability of its counterpart to display that level of flexibility. Market Segmentation and Revenue Generation model allows firms to offer the same products under different labels, sizes, appearances on the market, and generate revenue streams that will enhance its profitability. Value Proposition models can only come near to this characteristic possessed by the Market Segmentation and Revenue Model, by means of the Relational View theory which calls the formation of alliances, which may reduce the value of the market share a firm receives, depending on the scope of the market. The level of technology, nature of the competition, the quality of human resources employed, the presence or absence of strategic assets, the advantages of the available the economic theories, and the scope of the market are critical factors that will decide which of the models firms will use to strategize how they will generate revenues from the markets they operate in. According to Silicon Strategies Marketing (2011), its strategic objectives are to identify markets that can be quickly dominated, and from which it can grow. It then will move into roles of identifying the best segmentation models that it can prioritizes its resources, and enable to kick off its revenue generation flows (Silicon Strategies Marketing, 2011). The benefits can be derive from this classic application of Resource Base View and Relations View, according to Silicon Strategic Marketing (2011), are faster generation of revenue streams, and the establishment of corporate and product credibility in the market. Additionally by dominating the market in the short or long term, the company will be able to use that position of strength to attack other segments of the market and further strengthens itself. Value Chain Model The relevant Theory that a business intent on developing a Value Chain orientated model can successfully utilized are the Transaction Cost Economics, Resource Base View, and Value Chain Analysis, according to Rasmussen (2002). These theories will enable businesses to optimize vertical integrations, identify the need for complementary assets, and be able to perform highly creditable comparative analyses of all activities that will impact operations (Rasmussen, 2002). Value Chain Analyses serves to constantly monitor the efficiency of the quality of the values companies deliver to their customers. It will help these companies to be proactive in seeing areas that will impact negatively on its delivery, and to be able to effect changes by introspectively examining their primary and support services and redesign their modes of operations. In conjunction with Value Chain Analysis, Transaction Cost Economics theory enables firms to see where their cost structure gives them competitive advantages, and then to focus its resources in those areas to maximize the opportunities. The combination of all three theories affords strategically skilful companies opportunities to develop synergies. They can look internally and externally and develop products that will benefit from being strategic assets, transformed by the vertical integration activities pursued to refine their appearance, sizes, cost, taste, and availability, and the knowledge of what the competitors are offering. These products have greater potentials to become market leaders that will not be easily replicated elsewhere. Value Chain Models, according to Cuizon (2009), enables the implementation of integrated value chain that extends across and beyond the enterprise. It allows multiple value chain participants, inclusive of employees, managers, suppliers, and customers to deliver quality and strive for common goals (Cuizon, G. 2009). It will also promote understanding of the end to end process, eliminate, anomalies identified, prevent redundancies, facilitates process designs, effect transformations, and maximize the use of experience to shape outcomes constantly (Cuizon, G. 2009). The value Chain models seems more appropriate for very large organizations which operate in diverse environments even globally. Companies like Shell, IBM, Esso, American Airlines, Continental Airlines, and South West Airlines are examples of organizations that can successfully utilized all three theories. They can effectively employ vertical integrations from several angles after doing their cost analysis, and use their strategic assets to deliver products and services that attract customers in numbers that will ensure profitability and sustainability. It is significant to note that the Resource Base View (RBV) concept developed by Chesbrough and Rosenbloom (2002), was a common factor in all three models, and may be an indication of its theoretical importance in contributing to the design and development of models that may transform any company from a mediocre status to one of great international repute. Reference 1. Amit, R., Shoemaker, P. (1993). Strategic Assets and Organizational Trends Strategic Management Journal Vol.14(1) pp.33-46 2. NetMBA (2011). The Value Chain Internet Center For Business Management and Business Administration Inc. www.netmba.com/strategy/value-chain 05/19/11 3. Teece, D., Pisano, G. (1984). The Dynamic Capabilities of Firms : An Introduction Industrial and Corporate Change Vol.3 No.3 pp.537-556 4. Chesbrough, H., Rosenbloom, J. (2002). The Role of Business Model in capturing value from innovation : Evidence from Xerox Corporation Technology spin off companies Industrial and Corporate Change Vol. 11 No.3 pp.529-555 5. Fisken, J., Rutherford, T. (2002). Business Model and Investment Trends in Biotechnology Industry in Europe Journal of Commercial Biotechnology Vol.8 No.3 pp.191-199 6. Rasmussen, B.(2002).Open Invitation and The Network Firm Pharmaceutical Industry Project Working Paper No.31 May Center for Strategic Economic Studies Victoria University , Melbourne 7. Amit, R., Zott, C., (2001). Value Creation in E-Business Strategic Management Journal Vol. 14 pp.33-46 8. Porter, M. (1985). Technology and Competitive Advantage Journal of Business Strategy Vol. 5 No.3 pp.60-78 9. Wernerfelt, B., (1984). A Resource Base View of the firm Strategic Management Journal Vol.5 pp.171-180 10. Dyer, J., Singh, H. (1998). The Relational View Corporate Strategy and sources of Inter-organizational Competitive Advantage Academy of Management Vol. 35 pp.660-679 11. Teece, D., (1986). Reflections on Profiting from Innovation Research Policy Vol.35 pp.1131-1146 12. Cohen, W.M., Levinthal, D. A., (1980). Absorptive Capacity: A new Perspective on Learning and Innovation Administrative Quarterly Review Vol.35 pp.128-152 13. Hedman, J., Kalling, T. (2002). IT Business Models Concepts and Theories Copenhagen Business School Press Copenhagen 14. Coase, R., (1937). The Nature of the Firm www.sju.edu/faculty/watkins/coase.html , 05/.19/11 15. Corporate Views, (2008). Value Proposition www.corporateviews.com , 05/20/11 16. Silicon Strategies Marketing (2011). Market Segmentation www.siliconstrat.com/technology_marketing/market_segmentation.html , 05/19/11 17. Cuizon, G., (2011).What is Value Chain Business Management www.suite101.com/content/what-is-value-chain-a94413 , 05/19/11 Read More