Charles Baden-Fuller on what are business models and why they are so important for business success

 

Business Models as Models

 Charles Baden-Fuller and Mary S. Morgan

Drawing on research undertaken in the history and philosophy of science, with particular reference to the extensive literature which discusses the use of models in biology and economics, we explore the question ‘Are Business Models useful?’ We point out that they act as various forms of model: to provide means to describe and classify businesses; to operate as sites for scientific investigation; and to act as recipes for creative managers. We argue that studying business models as models is rewarding in that it enables us to see how they embody multiple and mediating roles. We illustrate our ideas with reference to practices in the real world and to academic analyses, especially in this Long Range Planning Special Issue on Business Models.

Introduction

 Does the idea of business models matter? The term has become widely used in board rooms, by managers in organisations, by consultants, by commentators of business, and even on radio and television programmes aimed at the general public. Indeed, it is more widely used nowadays than almost any other concept in strategy: when people are asked ‘what is strategy’? most give an answer that includes the words business model. The ubiquity of the term and the plethora of its uses suggest that business models are profoundly important to the world of work e yet man-agement academics rarely put the concept centre stage, preferring their established stresses on such concepts as competitive advantage, core capabilities, routines and resources. Public perception of its usefulness seems to fly against this academic reluctance (in main-stream journals and texts) to acknowledge the term, its uses and its consequences.

 

This article suggests answers to the questions ‘Why is the concept of business models useful’? and ‘Who uses them, for what, and how?’ We have sought answers that take seriously the ways in which business models function as models in various different forms, and brought into the management field insights drawn from writing and first hand research by historians and philosophers of science who have probed how models are used in disciplines beyond the management arena. Models, mod-elling and their discussion have a long history - particularly in biology and economics – that pre-dates the arrival of the business model concept in management thinking. We mobilize our thoughts in three sections:

 

The first compares scale models and role models to explain how the notion of business models enables us to classify businesses in a taxonomy or a typology. Although management scholars have long sought to classify their world, we argue that using the business model notion - and business models themselves - as classifying devices provide valuable ways to expand our under-standing of business phenomena and the development of ideal types.

 

The second section compares business models with the model organisms of biology and the mathematical models of economics to show how business models form instruments of scientific enquiry. This section is more strikingly novel to management academics, for it looks at the biology analogy in a new light: not that of an evolutionary theory of the firm (e.g. Nelson and Winter), but of the use of the methodology of the life sciences.1

 

The third section suggests that specific business models function like recipes: as practical models of technology that are ready for copying, but also open for variation and innovation. Here we move back to a more comfortable arena for management scholar-teacher-practitioners, but also one that opens up perspectives for further development.

 

Taken together, these three sections reveal how models, and modelling generally, and the use of business models in particular, already play a central role in progressing management thinking.

 

Business models as descriptions of ‘kinds’ in a taxonomy

 

One role of business models is to provide a set of generic level descriptors of how a firm orga-nises itself to create and distribute value in a profitable manner. This definition is manifest in many different ways and forms, and Table 1 shows a few examples of how writers is this issue approach business model definition.2 The table also provides a column showing how these writers make use of the many different notions of ‘model’ we discuss and analyse in this article. These (and, of course, many other) articles share a common feature ethey describe typical kinds of organisations and behaviours by firms (or perhaps units within multi-business firms) in such a way that we can label different kinds of behaviour and then classify individual firms accord-ingly. Thus, the general idea of business models is intimately linked with notions of taxonomies and ‘kinds’.

 

When business models come up in business discussions, they are often linked with the names of firms, each understood to epitomise a particular form of behaviour. These are existing firms, whose behaviour has been observed and is often given in a ‘nutshell’ description alongside their name. Some prefer the use of the name alone - the ‘McDonalds business model’ or the ‘South West Air-lines business model’; others prefer the counterpart brief description - ‘the franchising model’ or the ‘low cost airline model’, because it is the real business example. This naming and labelling in-vokes two different ideas of models that have the long-standing, common, senses of scale models, and role models. Scale models offer representations or short-hand descriptions of things that are in the world, while role models offer ideal cases to be admired - in these respects at least, the notion of business models resonates with our experience of models, from the arts and sciences to ordinary, everyday life.

 

A replica scale model of a tractor or a fire engine is a scaled-down version of a real thing, cap-turing only certain details of its style or mechanism; a model ship in a bottle has a similar character. They are small, simplified, and only describe some aspects of the real object: they might be de-scribed as ‘nutshell’ models, for it is not just an issue of scale, but of picking out the elements that seem most important to represent the object being modelled. Such models are very different from the role of a Chanel dress as a model for the mass market to copy, or Beckham’s legendary ability to ‘bend’ the flight of a ball acting as a ‘role’ model for young soccer players. These models do not offer scaled-down versions or generic descriptions: they are what they are, and play only an exemplary role. Thus, scale models are copies of things; role models are models to be copied. In busi-ness models, the two notions come together: the organisations named above and in Table 1 have exemplary status: real examples which give life to the short-hand descriptions - as Google is to the internet business model.

Table 1. What is a business model?

 

Authors	Definition	Focus of analysis includes	Notion of Model	Examples include
Teece	How a firm delivers value to customers	Situates the business model concept.	Kinds and Types;	Swift meat packers, Sea Land
	and converts payment into profits	Relates business model innovation	Role Models	containers, Netflix online DVD rental
		to technical innovation.
Zott & Amit	. a system of interdependent	Emphasizes interdependencies beyond	Kinds and Types	Ebay, Inditex (Zara), First Data corp,
	activities that transcends the	firm boundaries. Good design		FriCSo (start up in lubrication)
	focal firm and spans its boundaries.	requires: Content (what), Structure (links)
		and Governance (who does what).
Williamson	. cost innovation business model offers	How low cost business models	Role Models to	Shanghai Zhenhua Port
	advantages in radically new ways	from China (and India) work.	follow	Machinery, Haier refrigeration,
	meaning more for less.			Nano car- Tata
Gambardella	Business model is a mechanism	Business model innovation	Scale Models	Many references including
& McGahan	for turning ideas into revenue at	in high technology sectors that allows	or short-hand	Google, Apple, Ideo, Yogitech +
	reasonable cost	small firms to capitalise on their ideas.	descriptions	biotech start-ups
Itami &	. business model is a profit	Puts learning centre stage,	Role Models and	Toyota and Google
Noshino	model, a business delivery	classification by firm systems	Model Organisms
	system and a learning system
Yunus,	A value system plus a value constellation	A social business model that lies	Role Models	Grameen Bank + Telenor,
Moingeon &		between for profit and charity		Veoila and Danone collaborations
Lehmann-
Ortega
Casadesus &	The logic of the firm, the way it operates	Interfaces between business model,	Models capable of	Ryan Air
Ricart	and how it creates value for its stakeholder	strategy and tactics	manipulation	Telmore/TDC
Demil &	The way activities and resources are used to	Dynamics of business model	Model Organisms	Arsenal FC
Lecoq	ensure sustainability and growth	change over time
Sabatier,	Cross roads of competence and	Portfolios of business models	Recipes	French biotech firms
Rousselle &	consumer needs
Mangematin
Sources: See text.

scale models are copies of things; role models are models to be copied. In business models, the two notions come together

We leave go of the exemplary notion of model for the moment and its possibilities for copying (al-though we come back to it later) to explore how models understood as scaled down short-hand ac-counts lead to descriptions of kinds: taxonomy and classification. The real world of firms is made up of very many enterprises that behave and are organised in very different, individualistic ways. In contrast, theories of firm behaviour tend to be very general, such as the economists’ theory that firms act as if they aim to maximise profits, or the institutional theory in management that firms mimic other firms to gain legitimacy (even though this may not maximise their profits).3 Business models operate at an intermediate level between these two poles. Management scholars generate descriptions of firm behaviours that capture their salient features: like scale models, these business model descriptions are neither so general that they fail to distinguish the main differences between firms, nor are they so absolutely particular that they cover every last detail of contract and activity. Scholars recognise that firms e for all sorts of reasons - do not all behave the same: but nor are they all completely different, for if they were, every firm would appear to have a different business model. This ‘in-between’ quality is the first sense of what we mean by a ‘generic level’, but it is intimately linked with the second sense that lurks in the idea of business models - that there are generic kinds of behaviour which are distinctly dif-ferent. And it is these generic kinds of behaviour - that form the set of known business models at any point in time - that enable scholars to classify individual firms that they study into groups according to those described kinds. So, this classificatory function of the business model concept depends on these short-hand descriptions, these scale-models.

The virtues of descriptions at a level that characterise and label ‘kinds’, and so enable us to classify further individual observed examples into one of those kinds, is most evident in the field of biology. Knowing that something is an animal is often not very helpful, as we usually need to know what kind of animal it is. We can describe the characteristic differences between insects and mammals - taken as a whole - and make those descriptions useful for classifying things from the living world into these (and other) natural kinds. We can go down a level of detail and still this relationship - between description of kinds and classification - works well to sort spiders from flies, distinguish mosquitoes from houseflies, and recognise the difference between the sting-ing wasp and the benign hover fly. And while biologists who work on fruit flies do - for certain purposes - want to sort their specimens by eye colour or genetic detail, for other purposes such a highly detailed level of description is not needed. Different dimensions and levels of description serve different purposes; but the notion of ‘kinds’ is critical to the successful characterization of similarity and the definition of difference. Like the kinds of natural history, the role of business models as descriptors supports a classificatory function to distinguish and sort firms, because the descriptions they generate reveal kinds of business behaviour. This points us to the other sense of generic that is relevant here - as referring to ‘genera’ or classes: to ‘kinds’ of things.

This root notion of generic is nicely compatible with how economic historians have described and categorized the cohorts of firms that characterised the new ways of organising economic activity that marked particular historical eras (as illustrated in Table 2). Interestingly, these are not modern labels, but the contemporary labels given by the actual participants in those economies, suggesting that the notion of business model (if not its label) has long antecedents. In mediaeval times, goods were manufactured by members of guilds: the business model was one of single workshops, small-scale production, of craft skills used to produce single item goods with guaranteed-quality outputs and high value-added per piece. The first industrial revolution in the late 18th and early 19th centuries saw the development of the ‘factory system’ in Europe.

In this new business model, firms arranged their innovative manufacturing processes inside factories, with division and specialisation of labour, and with mass production but of a heterogeneous collection of goods (such as a variety of textiles) with low costs and low prices. (Such changes, as for other revolutions in business models, typically came with different learning systems and different inter-firm relations.) While the innovators of the guild system are surely lost in the mists of time, we know quite a lot about the innovators of the factory system, for they built ‘model factories’ in ‘model communities’ (such as the textile mills and associated settlements of New Lanark in the UK and Lowell in the USA) that offered a new formula for firm success that others flooded to copy. In the second industrial revolution of the late 19th/early 20th century, the ‘American system of manufactures’ replaced scarce labour with extensive cap-ital in the form of machines (such as the Ford moving production line) that made homogeneous goods, at low cost for the mass consumer (Singer sewing machines as well as Model T Fords).4 Arguably another industrial revolution is underway now, in the ‘Chinese system of manufacturing’ - Williamson alerts us (again in this issue) to a new breed of emerging market players who have moved from applying their labour cost advantage to technologically backward processes, towards a new business model offering much higher technology at low cost, coupled with un-matched choice of products. Citing its use in exemplar firms such as Haier (white goods) and Shanghai Zhenzua (port machinery), he warns this new base of competition in manufacturing will leave few places for more traditional rivals to hide.5

Of course many other business model taxonomies could be constructed - indeed, each business model definition will focus on different characteristics and so is likely to produce a different set of classes and so possibilities for classification (as we can see in Table 1). For those concerned with taxonomy in management - as in biology - there is no fixed number of labelled boxes, rather a set of kinds which may grow or change over time as ideas and knowledge about things in the world develop. For example, the models of industrial economics developed in the early half of the last century characterised types of firms according to their number in an industry and their competitive behaviour on the basis of pricing, whereas now (according to game the-ory) industrial behaviour is more likely to be characterised by a firm’s strategic possibilities and choices, which provides quite a different taxonomy.6 Each different way of sorting - based on new ideas, new empirics, or even new business experiences - may reveal different aspects to be of importance and so different elements to be analysed, just as Darwin’s tree of life revealed different connections and was used for different purposes to our modern genetic tree of life. In-deed, the current debates amongst biologists and philosophers about the implications of the revolution in genetic information hinge on rethinking the kinds of things that there are in the world, and how they relate to each other.7

different ways of sorting [firms]- based on new ideas, new empirics, or new business experiences [mean] different aspects [become] important so different elements have to be analysed

Building a taxonomy of business-model classes is not a straightforward task (as Lambert shows for e-business models), and nor is the subsequent process of classifying businesses into those classes. These projects, and their problems, have been well rehearsed in earlier literatures in management, as they have in other fields in which taxonomy and classifications are dominant activities.8 They are worthwhile activities however, for the possibilities they give us for not only defining but also for exploring characteristic similarities and differences and the relationships between classes, as well as for developing understanding, explanation, prediction and intervention. As both Crombie and Hacking note, taxonomy is one of the classic means of acquiring scientific knowledge.9 But while it is of course very useful to be able to recognise different kinds of firm behaviour, and be able to classify or sort firms into those different generic types, some further way of characterising business models as models is needed in order to understand the many other roles they can e and do e play, both for academics and for managers.

This brings us to a broader question about what sort of things business models are. It may help here to begin here with the difference between taxonomy and typology as a preliminary to under-standing the difference between kinds and types. The usual way to differentiate them is to think of a taxonomy as being the classes (or kinds) of things observed in the world, and as being developed from empirical work, bottom up. A typology is usually understood as delineating types of things (or events) where the types are decided theoretically or conceptually by the scientist, top down (see Table 3).10

However, Max Weber’s ‘ideal types’ - a highly influential notion in modern social sciences - are a bit of both. For Weber, ideal types are generalisations constructed from the facts of experience, yet they create abstract concepts that he described as ‘pure fictions’. So ideal refers here not to the notion of perfection, but to the adjectival form of ‘idea’ - and type refers not to a classificatory kind we meet in the world, but to a ‘mental construct’. The ‘ideal type’ notion is powerfully useful because, as he explained, it mediates between our ideas and theories on the one hand, and the things in the world we want to describe and explain in immediately practical ways:

The ideal type concept will help to develop our skill in imputation in research: it is no ‘hypothesis’ but it offers guidance to the construction of hypotheses. It is not a description of reality but it aims to give unambiguous means of expression to such a description.11

This notion of ideal types and typologies fits particularly neatly into the management literature, for we can go back to some classic examples in the history of the field that have particular relevance to this discussion of business models. The 1960s Aston Studies programme, led by Derek Pugh, developed labels and accounts of types of organisational behaviour (rather than of business models).12 His re-search process involved empirical description and measurement along various broad dimensional categories of organisational behaviour, descriptive statistical work to abstract patterns of those particular characteristics from the mass of those observations, and analytical statistical work to draw out the con-nections between these patterns, from which he conceptualised and labelled characteristic types of organisations. This sounds very Weberian in its combination of empirical analysis of kinds turning into conceptual ideal types, and of taxonomic work leading to a typology, and indeed Pugh related his work directly to Weber’s mode of research and substantive work on organisations.

Business models have the characteristics and fulfil the roles of ideal types: they are based on both observation and theorizing. But what empirical and conceptual scientific work goes into establishing them?

Business models, too, might be understood as ideal types, for they seem to have the characteristics and fulfil the roles that Weber associated with such types: they are based on both observation and theorizing. But if so, what kind of scientific work - empirical and conceptual - goes into establishing business models? They are certainly not isolated by inference from any large statistical study, as Pugh’s were: instead we argue that business models are produced by model work: that is, scholars investigate, with some considerable depth of scientific research, particular examples that form our set of business model exemplar cases. These scientific enquiries by management scholars provide an empirically and conceptually grounded account of each case to establish the full portraits associated with their ideal types, to accompany the shorthand (nutshell) descriptions by which they are known (the scale model). This is what we mean by ‘model work’, a term that relies on the notion of scientific models, and the way models are used in the sciences. This mode of research contrasts with Pugh’s process of data collection, extraction of patterns, correlation of patterns, and attribution of labels. His statistical work to construct a typology of organisations is replaced in the business model literature with model work in the construction of a typology of business models (see again Table 3). But, so far, we do not have enough explanation of what is involved in scientific research with models to support the claim that it is this kind of work which turns particular cases and short-hand business model descriptions into something as rich and as useful as an ‘ideal type’.13

Business models as model organisms for investigation

So we turn our attention to consider what kind of a scientific model a business model is, and what kind of work is done with it. It is not always obvious why a particular kind of business model is successful. For example, what elements are the real keys to the success of South West’s low cost airline model or Google’s internet model, which details have to be exactly so to make it work, and which are irrelevant and just happen to be present in the particular firm that is studied, rather than true of all firms of that type?14 Recent commentaries from the history and philosophy of science on the many kinds of models that inhabit the sciences, and on the ways models are used by scientists and for what purposes, throw some interesting light on these questions.15 In both biology and economics, as in management, models are used to address and help solve one basic problem - lack of knowledge. All three fields have grand theories, and lots of detailed studies, but sometimes lack a way to fit general ideas to the descriptions of events and objects of life in order to understand them. This is where models come in. Economic models are usually mathematical objects (often quite small) which are taken to represent various relationships in the economy as a whole, or the economic behaviour of firms or people. In biology we also find a different kind of model, the so-called ‘model organism’: real life objects such as the fruit fly, the laboratory mouse, the zebrafish, the C. elegans worm, the Arabidopsis plant, and so forth, chosen to represent different kinds of life.16 These two very different kinds of models nevertheless function for those sciences in rather similar ways, ways which may illuminate the use of business models in management science.

The economist and the biologist both use their models as valuable and sophisticated instruments to enable them to gain more knowledge about their worlds. In both fields, models need to be in-vestigated to provide a full understanding of how the model works and to know and understand its qualities. These investigations involve various forms of manipulation or experiment. Economists experiment with mathematical models to learn about the behaviour of the made-up world repre-sented in their model, to analyse its properties and to see what limitations if offers. They experiment by varying elements in the model in response to different ‘what if’ questions that come from their theories or from real world events (What pricing rules should monopolies follow? What should a government’s reactions be to a financial crisis, or a firm’s to doubled oil prices? How would con-sumers’ behaviour change if they paid for carbon usage?) and then reasoning mathematically with their model to come up with their answers.

Similarly, biologists experiment with their model organisms to learn how they work, but here the experiments are ‘real’ laboratory experiments. By intensive study of a few kinds of organism (a worm, a fish, a plant, a yeast, a mammal, an insect, etc.) the community of biologists study how life is lived in these different forms. They learn what behaviour is specific to each form, and what is general and shared between them, which processes and elements can usefully be compared and which not, and what makes them special and what does not.17 For both groups of scientists, models are the place where they figure out how their particular kinds of ‘things’ of the world work. They check these model findings against their theories, and also against behaviour in the world, to see how far the findings match the characteristics of the real world that their models pur-port to represent. Research via their models can yield insights into the grand theories, or the small-est details of behaviour, or help develop ideas about mechanisms that operate at some middle level. For both economists and biologists, the model object must be manipulable, or experimentable e for models must offer the kinds of descriptions that can be reasoned with, the kind of resources that can be investigated to answer questions (as Morgan explains in detail).18

When we look carefully at how business models are used by their communities, we find a variety of activities going on which we suggest makes them more similar to the model organisms of biology than to the mathematical models of economists. We have already seen how the academic uses busi-ness models to describe and give labels to how firms operate in various different generic ways, and then to classify firms according to which kind of business model they employ. But we also want to know why and how each model is successful as a business, why it is profitable. At that point, the particular business models we study take on aspects of the model organisms of biology. Indeed, one could argue that the exemplar case business models (such as McDonalds) are to management what the model organisms are to biology: real-life examples to study.19

exemplar case business models (like McDonalds) are to management what model organisms are to biology: real-life examples to study

But biologists also use model organisms to learn about life more generally. For them, the model they investigate is not just any mouse: it is ‘the lab. Mouse’ - a particular strain bred to a standardized form, and then investigated in exhaustive detail, by many different teams and methods, to ask and answer many different questions about that life form. But biologists also use a model organism to make inferences about other life in the same class, and in the more general class. Thus lab. mice are not just representative of mice, but also representative for their general class: mammals. The difference between ‘of’ and ‘for’ is relevant for our story.20 Since a model organism acts as a type representative for the bigger, general class/kind of which it is a member - lab. mice stand in for mammals, zebrafish for fish, fruit flies for insects, etc. - investigating any one of these particular representatives provides in-formation that may be relevant for the wider class. The same process of inference from the individual exemplar to the wider class goes on in business model research, which is why our opening discussion of taxonomy and of the classifying function of business models was so important.

In an analogical sense, a high street McDonalds can be thought of as a lab. mouse - as a standardized representative of McDonalds as a company. But also McDonalds (as a business) may be taken as a representative for a genre of firms that practice a similar kind of business model - ‘business format franchising’ - where a company designs a system to deliver a product/service (as McDonalds delivers hamburgers) and offers knowledge of the system on a fee-related-to-success basis. Business format franchising has become ubiquitous in food outlets, hotels, coffee bars, and in many consumer and small business services. And, while each business format franchise system is different, McDonalds remains the benchmark to which people refer, either centrally or tangentially, when analysing this particular business model: it is the model for business format franchising.

In the same way as biologists focus their study on a set of model organisms, business scholars repeatedly study the same organisations: South-West Airlines, Google, Disney, Toyota etc., to understand exactly how that kind of business model works, both in theory and in practice. This intensity of study creates a depth of understanding and provides an analytical account of each exemplar case, involving theorizing, concept formation, and a fully developed appreciation of its prac-tical details. It is this kind of model work, and the knowledge it produces, that turns the example into the exemplar case - something like an ideal type. It is these firms - a widely recognised set, often part of the teaching curriculum as well as the research laboratory - that form the model organisms of management. Each firm is studied not just for its own sake as an exemplar, but as the ‘type’ against which other firms following the same generic business model can be measured and com-pared.21 And of course, each exemplar can also be contrasted with firms practising a different model, i.e. members of a different class.

Thus, business models form the ‘stuff’ of many different kinds of enquiry, by both academics and firm participants, and these model investigations into business models take a number of forms. Some use a schema, or a mathematical model, which can be analysed and investigated. Others use the firm itself e the model organism. Both sorts of models of the firm - the first-hand real or-ganism and the various kinds of second-hand accounts of it - can be investigated to learn about the business model. For example, the academics’ Casadesus and Ricart build a representation of Ryanair’s business model, identifying inter-relationships and causal ‘feedback loops’ between particular aspects of its choices and consequences.22 In contrast, business men and women use their own firm as their model for experimentation, to consider how changing the way its business model is organized or competes can influence its possibility of success, as Magretta was among the first to record.23

Of course thought experiments or simulations and other business model manipulations are only possible when the model is (like those of economics) simple enough to work through (or where the implications of a likely change can be programmed into it), but yet complicated enough to capture sufficient content of the firm’s arrangements to make the experiment meaningful. For investigations into the exemplar cases, management academics gain some of the advantages of complexity and realism of real life firms, without of necessity, having a full account of everything involved in the specific firm. Here is where in-depth case study investigations of the exemplary business are so valuable.24 For the managers’ real-world firm experiments, the business model is more like the biological model organism - an incredibly complicated set of arrangements where every slight change in one bit is likely to alter all the other relationships. Here e as with biologists - managers experimenting with the business model are undertaking a real life experiment subject to all the unknowns that involves.

Table 4 shows some of the ways in which such experiments have broadened and deepened our understanding of business models. The accounts provided in this issue show that some of this work is via thought experiments, some via experiments on schematic models, and some involves managers experimenting on their firms in the real world. And some experiments take place in the context of transforming an existing business, while for others the context is one of exploring to build a new business.25

The most important difference from both economics and biology occurs when managers experiment on their own firm, for they know lots about the elements and relations involved because they are part of it. Managers have tacit ‘insider’ knowledge that the academic does not have, and which may not be part of any business model account or description. This inside knowledge is surely the most unusual thing about business models as models, and what distinguishes them from the models of other scientific disciplines: that the subject of the model or experiment - the firm or business and its people - is a knowing part of the model, and of experiments with it. This makes business models performative in a particularly reflexive way.26 The experiments by these managers are on their own firm and involve their own behaviour. For them, and for the people in the firm, their business model is not just a description of how they go on, but offers a model in the ideal sense, in depicting how they want to be in the future, a model to strive for, an ideal outcome. The specific business model a firm adopts offers a point of identification which may be essential to rally its participants, particularly if radical change in the model is planned. After all, such experiments amount to changing the model organism - something not to be undertaken lightly.27

Business models as recipes

The experiences of managers point us to an essential element of business models as models - that they are practical things and have a dynamic aspect to them: as Demil and Lecoq explain, firms experiment, change, refine and re-invent their business models.28 This introduces one more notion of models that we think is important, and which comes from the practical and technological do-main rather than the scientific one. Architects’ construction models have been used for centuries, not just to persuade donors to fund construction, nor only to specify aspects of the building con-tract, but in many cases (as the records of St. Paul’s Cathedral show) to illustrate salient details of radically new construction techniques to carpenters and masons.29 This notion of a model as some-thing that demonstrates a technology (rather than as a technology of scientific investigation, as considered in the previous section), is particularly interesting, as such models often display or instantiate matters of principle (how joists are to be joined to support a roof) as well as details of style and content (exact arrangements, decorations, and so forth). They are used to demonstrate or give advice about how to do something so that the results will come out right. There is no par-ticular name already given for such models, but they can be well conceived of as recipes: they embody some general principles (of cooking: baking, roasting, frying etc and cooking times and temperature, etc.) as well as particular details of the ingredients and their assembly for specific dishes.30 They lie between principles - general theory - and templates - exact and exhaustive rules (as discussed in Winter and Baden-Fuller’s article on replication referenced earlier). Recipes depend (in a parallel manner to architects’ models) on considerable tacit knowledge of the craft of cookery, and on how they represent that knowledge, to make them usable.

Models are used to demonstrate a technology. [like recipes] they give advice about how to do something so the results come out right

As with recipes, business models provide managers and scholars a way to describe and distinguish the variety of types of business behaviour we find in the world of firms, and to outline how the exemplar cases provided by certain famous examples fit in. Ideal-type business model examples provide recipes that have been already tried and tested in the world, ideals that other firms may aim to follow, and on which they may make more or less minor variations without changing the basic recipe for success. While businesses (or units) may copy other firms by following either principles or templates, business models - understood as recipes - offer another way to copy. But they also suggest that there is no one way by which a business can make money, but many generic types, and many possible variations within each.

Of course, recipes require ingredients. In the case of business models, these are a variety of strategic elements - resources, capabilities, products, customers, technologies, markets and so forth. But, business models cannot just be defined as the set of elements - to do so would be to ignore the fact that business models function as the recipes that draw the elements together and ‘cook’ them - arrange and combine them in ways (old and new) through which firms may be successful or not. The recipe notion includes therefore both the organisation and integration of the main elements of the firm’s activity, and provides a set of rules that, if followed, can be expected to produce a particular kind of outcome. Of course, recipes work on the basis of given technologies and ingredients, which may only have value for that particular recipe and dish. Changing the recipe - or, more radically, the dish - will change the value of the technology to the business model and its ingredient/resource requirements.

Lest this all seems overfanciful, we have in fact borrowed the notion of models as recipes from Boumans’ (1999) account of the development of business-cycle models in economics as resembling the development of cookery recipes. When looking at how economists build their models, Boumans says:

Each case. contains a new recipe that initiated a new direction in [business-cycle model] research, but in each case the recipe was different. The integration of a new set of ingredients demands a new recipe otherwise the result will fall apart. However, a recipe is not unique in the sense that it is the one and only way to integrate a certain set of ingredients. Thus a new recipe is a manual for a successful integration of a new set of ingredients.31

The idea of the recipe suggests how the chef, within broad constraints of the principles of cooking and the kind of dish chosen, may create variations and innovations. If business models play the same role, they too are not open ended but constrained, and involve ingredients that must be arranged and combined according to the recipe (i.e., to some generic business model), but yet have many possibilities for innovation. Just as the creative chef will innovate to produce a new recipe for a successful dish, the creative entrepreneur or manager may innovate to build a new business model, a new recipe for firm behaviour. To reinforce the point that e as in recipes e the possibility for innovation in business models is one of their fundamental features, we point again to Table 2, where economic history displays deep and long run changes in the ‘standard’ business model of a period (and, indeed, the whole notion of innovation in business models is taken up in several articles in this special issue). Innovation, clearly, can take the form of variation to suit changing situations. Thus, a chef may cook several dishes simultaneously, using different ingredients, for different parts of the meal: Mangematin cogently ar-gues that managers may follow several recipes at once for different markets, or repeat the same recipe to enter different markets.32 Or there may be new appetites to feed: Thompson and MacMillan, Yunus et al. and Dahan et al. suggest new forms of business model collaborations to address the needs of the world’s poorer societies.33

The notion of a business model as a recipe captures something quite essential about a firm’s behaviour. The concept ‘business model’ can be said to define the business’s characteristics and its activities in a remarkably concise way, in other words, in a way that matches the generic level that defines a kind or type of behaviour (neither too general nor too particular in its detail) but that also suggests why it works, because it embodies the essential elements and how they are to be combined to make them work. Of course, not all cooks can make all recipes work e and not all managers are equally proficient at making a business model work. In this respect Spender’s 1980 thesis Industry Recipes considers iron founders and dairy companies and explores what is needed to make their business recipes successful. He notes that different combinations can create success, and that management and its attitude are key parts of success.34 Porac, Thomas and Baden-Fuller, looking at the cognitive communities of Scottish knitwear firms, also unpick the role of attitude and mind-set in the business model, and point to a small group of like-minded firms successfully sharing a recipe by adopting a common mindset.35

not all cooks can make all recipes work e and different combinations (ways to make and bake the cake) can create success

The analogical notion of business models as recipes, along with their associated exemplar real cases for each business model type, also allows us to see why the conversation about business models is so important in the real life of organisations. Just as the young footballer is inspired to ‘Bend it like Beckham’, so TV presenters interrogate managers and entrepreneurs about their business model, expecting answers that give a recipe, along with the label of the well-known company that gave its name to the exemplar. Likewise, managers (and even workers) can be inspired to change behaviours with reference to the business model of an iconic and successful company.

Although many claim that the term ‘business model’ only gained currency in the internet boom years of the late 1990s, its modern public usages in fact mirror the interest shown in ‘model factories’, ‘model communities’ and ‘model farms’ at the turn of the 18th into the 19th century. In their time, they were well-known exemplary cases, and visitors flocked to see the design and the working of such business models: examples to be copied in more or less detail, with more or less variation, but copied just because they instantiated the most perfect e the most up-to-date and innovative - economic organisations of their day and kind.

Conclusions

Our discussions suggest that business models have a multivalent character as models. They can be found as exemplar role models that might be copied, or presented as nutshell descriptions of a business organisation: simplified, short-hand descriptions equivalent to scale models. We can think of them not only as capturing the characteristics of observed kinds in the world (within a taxonomy), but also as abstract ideal types (in a typology) in the sense Weber outlined. And when we do so, we can see how this analysis of business models as models challenges the idea and ideal of any single, or fixed, taxonomy or typology of business models. Rather, the developing analysis of business models itself has prompted the expansion of taxonomies and typologies in ways which throw new light on the nature and role of business models themselves.

Business models also function as models in the scientific sense. They can be investigated as model organisms (as in biology) that stand in as representatives for a class of things. Or they may appear as schemas in academic slides and as representations that can be manipulated like economic models, where, like scientific models in many fields, they appear as generic in-between kinds-of-descriptions that are neither general theory nor full empirical descriptions. And when we look carefully at these very different kinds of scientific models, we see that they function as laboratories that enable the scholar both to generate concepts and theories and to investigate empirical domains. Just as in other fields of science e from biology to economics to physics - business models function as mediators to enable users to figure out how their world works in the practical context, as well as in the academic.36

Finally, we have explored the analogy of models as recipes to understand the role of variation and innovation within the constraints of ingredients and purposes, and their use by managers to motivate strategy changes, and to experiment with their organisations.

We are not suggesting that business models are models in just one of these senses, or play just one of these roles, because these senses and functions are not mutually exclusive. Business models are not recipes or scientific models or scale and role models, but can play any - or all - of these different roles for different firms and for different purposes: and will often play multiple roles at the same time (as Table 1 shows). This explains not only why the idea of business models seems to be so pervasive and yet also so challenging to grasp, but at the same time why the concept is so potentially rewarding for the future of management research.

Business models are not recipes or scientific models or scale and role models. they play any - or all - these roles, often at the same time

Acknowledgements

We were provoked to write this piece by Rob Grant’s challenge: ‘Why do we need the business models concept? What use is it?’ We acknowledge support from the EPSRC (grant number EP/ E037208/1) on Financial and Organizational Innovation. We thank those who commented on the original draft, especially historians and philosophers of science: Marcel Boumans, Sabina Leonelli, Simona Valeriani; and management scholars: Sid Winter, Rob Grant, Giovanna Padula, Rodolphe Durand, and Benoit Demil; all those who participated in the discussion at our presenta-tion at the Cass International Workshop on Business Models in December 2009, and finally Jon Morgan for his inspired editorial work.

References and source of publication one can see here - https://tinyurl.com/3myyep74

What are business models - Charles Baden-Fuller

Professor Charles Baden-Fuller talks about the difference between value creation and 

value capture, robustness, sustainable competitive advantage today and tomorrow, and scalability.

In his recent article in Long Range Planning, Business Models as Models, Charles explores the 

question "Are Business Models useful?" where he points out that they act as various forms of model: "to provide means to describe and classify businesses; to operate as sites for scientific investigation; and to act as recipes for creative managers".

https://tinyurl.com/yxwr7wzm