Abstract
The business model concept is widely used by practicing entrepreneurs and scholarly research on the business model concept has made contributions to the management literature. This essay links the business model literature to the growing work on the individual–opportunity nexus—which is a developing scholarly framework in entrepreneurship. Three potential linkages of overlapping research are discussed including research on the development of entrepreneurial taxonomies and conjecture formation.
Keywords
Introduction
The business model concept has immense value as a framework for practitioners to generate and test theories about how a business delivers value to its customers. This essay postulates that a way to advance business model research is to integrate the literature on business models with the Individual Opportunity (IO) nexus—which is a developing scholarly framework in entrepreneurship.
The IO nexus
The IO nexus is a developing framework that defines the scholarly domain of entrepreneurship as the examination of how, by whom, and with what effects; opportunities to create future goods; and services are discovered, evaluated, and exploited (Eckhardt and Shane, 2003; Shane and Venkataraman, 2000; Venkataraman, 1997). The components of the framework are opportunities, technology, individuals, and conjectures. Opportunities are defined as situations in which goods and services can be introduced for profit, and technology is defined as a means that can be used to accomplish a specific end. Combining the two, opportunities can be thought of as technically feasible latent demand, where demand includes goods and services that buyers may or may not have considered as something that they need. Within the framework, individuals are agents who operate alone or on behalf of an existing organization. Finally, conjectures are typically defined as a conceptualization that exists in the mind of an individual about a specific opportunity (Eckhardt and Ciuchta, 2008).
While the IO nexus can be used to frame a variety of different forms of entrepreneurship, in its simplest application, entrepreneurship is initiated when an individual begins to attempt to commercialize a perceived opportunity based on a conjecture that forms in their mind that an opportunity exists. Conjecture formation is often theorized to be driven by information that is received by a specific individual, their ability to associate new information with what they already know, and their existing stock of knowledge. Conjectures about opportunities can be formed purposefully, but they can also be formed accidentally as individuals engage in the ordinary business of life.
While opportunities represent the feasible set of goods and services that can be brought to market at any given point in time, opportunities themselves are not businesses. For entrepreneurs to build businesses, they must successfully design business models that exploit specific opportunities. Hence, our understanding of business models is central to the development of the opportunity-focused literature in entrepreneurship.
Research opportunities at the intersection of business models and the IO nexus
Most simply stated, a business model is how an enterprise creates and delivers value to customers and then converts payments received into profits (Teece, 2010). The business model concept is different from the profit equation. The profit equation typically only articulates resources utilized—such as labor and capital—and how they relate mathematically. In contrast, the business model is finer grained in the treatment of inputs, and relationships are typically not articulated mathematically. For example, in the case of labor, business models typically differentiate employees who work in sales from employees who work in market research, and how they interact is typically quite nuanced. Hence, the profit equation is generally a tool for economists, while the business model is a tool for managers and entrepreneurs.
There are several potential areas of scholarly inquiry at the intersection of the IO nexus and business models that has the potential to advance our understanding of entrepreneurship. I touch on three, here: research on conjecture formation, research on taxonomies, and research on entrepreneurial education.
Conjecture formation
While developing, existing empirical and theoretical work on conjecture formation about entrepreneurial opportunities is nascent and is mostly focused on studying how entrepreneurs conceptualize their initial idea for their venture. For example, Shane (2000) finds that the prior knowledge of individuals appears to influence the type of conjectures individuals form about the existence of specific opportunities based on a single technology. Baron and Ensley (2006) report that experienced entrepreneurs form different types of conjectures about opportunities than novice entrepreneurs. Gregoire et al. (2010) study the cognitive approaches toward early conjecture formation, and Gruber et al. (2013) find that prior knowledge and new knowledge acquisition influence the characterizations of the set of conjectures that individual entrepreneurs form. As indicated by this concise review, for the most part, this work is mostly focused on the study of what drives initial insights individuals have about the existence of entrepreneurial opportunities.
Research on business models can be used as a framework to advance the research on conjecture formation beyond the study of initial insights for some groups of entrepreneurs. For example, one way the entrepreneurial process is postulated to evolve is that business models are purposefully used as frameworks to generate detailed causal theories that clearly articulate relationships and unknowns about opportunities and businesses that require testing. These entrepreneurs then test their theory against the realities of the marketplace, and their business model is used as a framework to record and make adjustments based on what is learned (Mullins and Komisar, 2009; Ries, 2011). Contemporary business authors and practitioners have adopted the language of theory testing used in science when they discuss ways to test and verify business models.
Another view on how the entrepreneurial process can evolve is that individuals are less purposeful and perhaps accidental in how they develop and refine conjectures about opportunities as they pursue them. In some treatments, improvisation is compared to planning before execution strategies such as the business model as theory approach described in the preceding paragraph (Baker et al., 2003). In either approach, if successful, the outcome is the same. A business model is created that can be identified and communicated to others using a variety of different frameworks.
Business models can be thought of as sophisticated conjectures that go far beyond the cognitive treatment of conjectures in the existing literature. Hence, scholarly research on business models is likely to inform our understanding of conjecture formation and refinement in a way that is likely to further our broader understanding of entrepreneurship. One important question is the relative effectiveness of theory-driven action in entrepreneurship versus the more reactive improvisation decision framework. Ethnographic research is likely to be particularly helpful in developing theory and in cataloging the variety of different ways entrepreneurs conceptualize business models due to the limitations of incorporating the range of relevant dimensions of business models in secondary research. However, it is important to acknowledge additional multivariate analysis is needed to provide robust inferences on business model formulation.
Research on taxonomies of business models
Research is desperately needed that classifies characteristics of business models and then associates characteristics of business models to specific outcomes. The applied literature on the development of business model frameworks and taxonomies has jumped ahead of scholarly work in the area. For example, scholarly typologies and taxonomies typically aggregate business models into a few dimensions (such as novelty or efficiency) while the applied literature such as Osterwalder and Pigneur (2010) describe business models using over 45 different attributes in nine distinct categories. While the practitioner literature is more detailed, the practitioner literature does not include robust statistical inferences about the relationship between characteristics of business models, and performance, as exists in the scholarly literature (Zott and Amit, 2008).
This means that our understanding of the various dimensions of business models and the ways they can be configured can benefit from further scientific inquiry. The development of taxonomies of business models could utilize inductive and deductive approaches to build frameworks that could be used to both detect and describe characteristic of business models. While much of this work may appear to be atheoretical, theory often requires the establishment of facts to advance. This work is likely to be essential to the rigorous advancement of opportunity-based frameworks.
Another potential area of research is the development of theory that links specific characteristics of business models to specific types of opportunities. For example, no theory currently exists that is useful in predicting the types of opportunities where business models that utilize open innovation might be appropriate, and the likely performance outcomes from such a linkage. The state of understanding is that it is known that open innovation models are important attribute of some successful products—such as Mac OS—while it is not an important attribute of others. More broadly, scholarship has yet to develop an actionable set of theories linking characteristics of business models to outcomes, and this remains a promising area of scholarly inquiry.
Research on the role of education in entrepreneurship
The development of a body of work that describes business models and also associates attributes of business models with specific outcomes is likely to foster a more rigorous applied literature in entrepreneurship on the use of business models in practice. This means that the literature on business models has the opportunity to foster the development of conceptual tools that can increase the success of practicing entrepreneurs.
For example, research has shown that experienced entrepreneurs assess business opportunities differently than those with less experience (Baron and Ensley, 2006). A potentially important area of research with both positive and normative implications is the study of how training in business model techniques may influence the existence and rigor of conjectures formed by individual entrepreneurs. For example, an entrepreneur trained on the appropriate use of business models may be more likely to be able to conceptualize situations where profitable businesses might be formed when compared to individuals who have not received such training. Hence, research in this area has the potential to link scholarship to practice in a meaningful way.
A few comments on “The business model: present and future—beyond a skeuomorph”
Richard Arend (2013) has provided a service by initiating this dialog on business models in Strategic Organization! There are several helpful points made by the author that are important to acknowledge. First, Arend echoes much of the management literature on business models in his view that the business model is a concept that describes a richer relationship between inputs and outputs than can be described by mathematical firm-level production functions. Second, he correctly notes that despite recent advances (Teece, 2010; Zott and Amit, 2010), the academic literature has yet to arrive at a generally accepted definition of business model. Third, the author’s view on the potential of multilevel exchange in business models as an area for additional research is likely to provide benefit. Finally, Arend is likely correct that managers of nonprofit organizations, and scholars who study nonprofits, are likely to benefit from considering how business models might relate to nonprofits.
However, scholars and practitioners of business models are likely to be concerned about many ideas presented in the essay. First, the author sets up an odd dichotomy between the use of business models in practice and theory. Practitioners use business models as an important means to theorize about businesses and work on business models is an area where practice and theory are closely linked. This particular interface between application and research is showing great promise, and unfortunately, much of what the author proposes would create a disconnect when one is neither needed nor beneficial. Second, the author devotes much of his essay to the idea that business models are theoretically limited because they are profit focused, and that the way to advance scholarship on business models is to expand the concept to nontraditional business contexts, nontraditional ownership structures, and nonprofits. The focus on profit in the business model concept has many benefits, including forcing a logic of internal and external consistency. Dropping the focus on profit is likely to muddle the business model concept in the academic literature without yielding benefits.
While the business model as such is not relevant to the nonprofit context, the authors should be commended for realizing that some sort of business model-like tool is likely to be of benefit to nonprofit management. I suggest that scholars interested in the topic pursue the development of the nonprofit model, which could be organized around two different frameworks. The first could be a framework that would help managers of nonprofits establish goals that could force the same type of external influence on the goals of nonprofits that is forced upon for-profit firms by the needs to profitably serve customers. The second framework could perhaps take goals as given and work toward providing a means to classify and relate the variety of different resources that are available to nonprofits to achieve the established goals.
Finally, Arend expresses concern regarding the lack of clarity around the unit of analysis for the business model concept. In practice, the level of analysis of the model is often an endogenous choice of the entrepreneur or manager based on the specific issues they are trying to examine. In some situations, the business model might be used to examine economics of scope, while in other situations, it might be focused on examining the feasibility of a model for a single-product firm. Hence, the business model is similar to other tools—such as Net Present Value—that can be applied to analyze a single project or the value of a firm. The fact that the unit of analysis is not standardized speaks of the flexibility and usefulness of business models as a tool, and thus, this might not be a limitation.
Conclusion
The business model concept has immense value as a framework for practitioners to generate and test theories about how a business delivers value to its customers. As such, research on business models that is grounded in practice has the opportunity to advance scholarship in entrepreneurship on the IO nexus—which is an important scholarly framework in entrepreneurship.
Footnotes
Acknowledgements
The author greatly appreciates feedback that was provided by the editorial team that improved this essay.
Funding
Research support was provided by the Robert Pricer Chair in Enterprise Development.