Business Models

The concept of competing on business models seems to be en vogue right now. Witness HBR’s recent “How to Design a Winning Business Model” (one article in an entire edition dedicated to business models) or “Why Companies Should Have Open Business Models” by MIT Sloan Management Review. But surprisingly, there is no general, agreed upon classification of business models.

Another recent article (link) claims to remedy this. It offers a business model classification based on a four by four matrix, defining the types of assets a company sells and the rights it grants customers to use those assets.

The four asset types are: 
• Financial assets (cash, stocks, bonds, insurance policies, etc. – anything with a right to potential future cash flows);
• Physical assets (both durable and non-durable goods, food, etc.);
• Intangible assets (patents, copyrights, but also knowledge, goodwill and brand value);
• Human assets.

The four ways companies can manage assets to generate revenues are:
• Creators sell ownership of products they created by transforming or assembling raw materials, components, etc. 
• Distributors resell products that they did not substantially change.
• Landlords sell the right to use an asset for a specific period of time (e.g. a hotel room or rental car). The authors of the article included in this category also companies like Microsoft who sell licenses, i.e. limited rights to use their intellectual property. 
• Brokers receive a fee for matching buyers and sellers without taking ownership of a product.

The framework has a number of advantages in that it allows comparisons across a variety of industries. But there are certainly also drawbacks: Some of the classifications seem a bit arbitrary or farfetched: Where do you classify Citigroup’s large retail banking business, or CBS’s TV business, for example? The concepts of “financial landlord” or “IP landlord” seem to be a bit of a stretch for some of these businesses. Or where do you put a pharma company: a creator of physical goods, or an IP landlord? Maybe those are just classifications and labels that we’re not (yet) used to.

One thing that sticks out very quickly is that many companies cannot be easily classified into one bucket. A company like Disney, for example, is a landlord (renting access to physical assets like theme parks) but also a licensor of intellectual property. As a matter of fact, Disney’s business model has shifted dramatically over time, from over 65% “landlord” in 1984 to largely licensing intellectual property (15% of revenue in 1984, 63% in 2009).

The authors also looked at which business models are prevalent, and which ones are valued by the stock market more than others. They analyzed over 10,000 publicly traded companies in the US, classified their various businesses into the business model buckets described above, and created groups that then allowed them to track stock market performance. Some of their key findings:

• Only about 10 of the 16 potential squares in the four by four matrix have a significant number of companies and revenues, some business models are not really applicable or legal.
• 57% of the revenue of all the US listed firms is linked to “creators,” 28% to “landlords,” and 14% to “distributors.” Brokers only generate 1% of all revenues. 
• 81% of the revenue of all the US listed firms is linked to physical assets, 9% to financial assets. 
• Creators of physical assets, in particular a subgroup of “innovators” within this bucket, generated the biggest stock market returns.

I find this to be a very helpful framework for companies to think through their various businesses: Where are we today? How has our business changed over the past 10 years? How do we compare to traditional competitors and emerging players? Where do we have the competencies to adjust our business model?