Peter Drucker argued that a firm’s business model—the “theory of the busi- ness” in his words—has three parts: assumptions about the environment of the organization, the specific mission of the organization, and the core com- petencies needed to accomplish the organization’s mission (Drucker, 1994).
Together these assumptions define what an organization gets paid for, what
results it considers meaningful, and what it must excel at to maintain its competitive position.
Subsequent studies emphasized three business model elements that have received substantial support in the literature: the delivery of a value prop- osition to customers, the activities required for such delivery, and a logic of how these activities create profits for the firm (Amit and Zott, 2001;
Chesbrough and Rosenbloom, 2002; Johnson, Christensen, and Kagermann, 2008; Magretta, 2002; Teece, 2010; Zott and Amit, 2010; Zott, Amit, and Massa, 2011). Although the revenue model has received most attention, the business system—the collection of all activities by which the value proposi- tion is delivered—has been argued to be the true substance of the business model (Itami and Nishino, 2010). Thus, the business model is understood as a detailed specification of the activities a firm undertakes to exploit an identi- fied opportunity (Morris, Schindehutte, and Allen, 2005). It is based on the information and knowledge through which a firm brings together partners, suppliers, customers, and other parties in its network (Voelpel, Leibold, and Tekie, 2004). Besides this objective definition of the business model, the busi- ness model also consists of subjective components (Doz and Kosonen, 2010).
These are the cognitive aspects with regards to the boundaries of the firm, competition, and the economic, competitive, and institutional contexts that affect the industry in which a firm is active, and the benefits that should be included in a product offering (Doz and Kosonen, 2010). Table 5.1 lists the major business model elements (see Osterwalder, 2004).
Business model innovation is about creating a new value proposition and reconfiguring the business system in a way that supports this value proposi- tion (Markides, 2000; Osterwalder, 2004). Through strategic sensing, busi- nesses can identify opportunities created by environmental changes, and then capitalize on such developments through changes in various elements of the business model.
Scholars have suggested that firms generally pursue two main activities to create or adapt business models: experimentation and effectuation. Morris, Schindehutte, and Allen (2005) argue that the innovation process is emergent rather than planned in nature and relies heavily on rules of thumb and a pro- cess of trial-and-error. Due to the uncertainty that firms face when building or renewing business models, effectuation is another process to aid business model development (Sarasvathy, 2008). Because the benefits of analysis are limited in such contexts, knowledge is instead expanded through enacting the situation (McGrath, 2010).
The crux of business model innovation is not solely the reconfiguration of the objective elements of the business model (Chesbrough, 2010). Instead, firms are generally well aware of the changes required to their business model but encounter significant organizational barriers when carrying them out. The literature on organizational change and strategic renewal provides insights into how organizations move through change processes. For example,
Study Value Proposition Revenues and Costs Activity System Relationship with the Customer
Partners
Afuah andTucci (2003) Customer value Pricing; revenue source; cost structure
Connected activities;
value configuration
Alt and Zimmerman (2001) Source of revenues;
business logic
Structure; processes Processes Structure
Amit and Zott (2001) Transaction component Architectural
configuration
Transaction component
Applegate (2001) Product and service offered Benefits returned to the firm;
financial performance
Operating model Marketing sales model;
brand and reputation
Partners
Bonaccorsi, Giannangeli, and Rossi (2006)
Income; cost structure
Brousseau and Penard (2006) Revenue steam; cost structure;
income generation
Assembly costs Knowledge management Transaction costs
Chesbrough and Rosenbloom (2002)
Value proposition Cost structure Structure of the value chain
Position in the value chain
Gordijn (2002) Value offering Value exchange e3-value configuration Actors
Hamel (2000) Product/market scope Pricing structure Core processes Relationship dynamics Suppliers; partners;
coalitions Linder and Cantrell (2001) Value proposition Pricing model; revenue model Commerce process
model
Commerce relationship
Magretta (2002) What does the customer value?
How do we make money in this business?
Bock et al. (2012) document the effects of culture and structure on a firm’s strategic flexibility during business model innovation, while on a more applied basis both Hamel (1999) and Markides (2000) offer insights into the challenges executives face in implementing new business models.
While this growing body of literature on business models provides impor- tant insights into the way a firm configures itself vis-à-vis external actors, it has less to say about the internal workings of the firm. Of course, this literature doesn’t entirely focus on external factors: Zott and Amit (2010), for example, highlight internal governance as a key component of a firm’s business model.
But nonetheless, there are important features of the internal organization of a firm, in terms of the systems, processes, and style of working through which business activities are managed, that do not get addressed in the business model literature.
This is where the notion of a management model comes in: it is a way of characterizing the internal workings of the firm.
A firm’s management model is the choices it makes about how work gets done—how activities are coordinated, how decisions are made, how objec- tives are set, and how employees are motivated (Birkinshaw, 2012). It is linked to the firm’s business model, often as a way of operationalizing some of the business model choices that have been made, but it is also something that can be identified and understood in its own right.
Of course, there are many existing bodies of literature that characterize, in various ways, the internal workings of the firm, so it is important for us to show how the notion of a management model is distinct from them, and therefore why it is a useful concept to develop further. We focus on two such bodies of literature—contingency theory in the field of organization studies, and the culture literature in organizational behavior.