What Is a New Business Model?
Professor Porter believes there is no such thing as a “business model,” let alone a new one, and I don’t fault him for questioning the validity of the term. Analysts have used it loosely, in reference to everything from selling rocks online to a Vickery auction for financial services.
Often the term “business model” is used more or less synonymously with “business strategy.” For example, Adrian Slywotzky describes it as “the totality of how a company selects its customers, defines and differentiates its offerings (or response), defines the tasks it will perform itself and those it will outsource, configures its resources, goes to market, creates utility for customers, and captures profits. It is the entire system for delivering utility to customers and earning a profit from that activity.”
Our view is narrower than this. Quite simply, a business model refers to the core architecture of a firm, specifically how it deploys all relevant resources (not just those within its corporate boundaries) to create differentiated value for customers. Historically, strategists weren’t particularly concerned with business models, because each industry had a standard model, and strategists assumed the model in that industry. Although the auto manufacturer, the integrated steel company, the insurance company, the retailer, the oil company, and the bank were different, they shared the characteristic of vertical integration.
Traditional business theorists like Michael Porter favor vertical integration and argue against partnering. In his seminal book, Competitive Strategy, he devotes an entire chapter to a vigorous defense of the vertically integrated firm. Today he writes how the “myth” that “partnering is a win–win means to improve industry economics” has “generated unfounded enthusiasm for the Internet.” He cites a litany of reasons he believes it’s better not to partner.
However, it is indisputable that the Net dramatically reduces search, coordination, contracting, and other transaction costs between firms. Because of this, myriad new business models have emerged that are different from the industrial-age template, and there are hundreds of old and new companies that are winning by focusing on their core capabilities and letting partners do the rest.
For example, Siebel Systems Inc., one of the fastest-growing software companies in America, has established a vast and unique network of customer, supplier, and employee relationships to deliver its products and services. Tom Siebel claims his company’s b-web is the most important element in its success: “We only have 8,000 people on our payroll, but more than 30,000 people work for us,” he says. The relatively small core company creates software products and orchestrates an extensive b-web composed of consultants, technology providers, system implementers, suppliers, and vendors that take its products to the global marketplace. The result: Siebel Systems’ revenues soared more than 1,400 percent in just three years, from $118 million in 1997 to $1.8 billion in 2000.
Yesterday’s strategy orthodoxy blinds managers to these unprecedented corporate opportunities. The business strategist needs new tools, including strategic concepts and analytical methods, to comprehend and exploit business architectures, like b-webs, that are suddenly possible because of the Net. I call this “business model innovation.”
When the superiority of the vertically integrated industrial corporation was taken for granted, it was assumed that most resources would be internal to the company. A business’s human-resources strategy dealt with people on the payroll. Accounting handled customer payments. Simple.
But in the Internet era, we know firms can profit enormously from resources that don’t belong to them. This is much more than what we call outsourcing today. In the future, strategists will no longer look at the integrated corporation as the starting point for creating value, assigning functions, and deciding what to manage inside or outside a firm’s boundaries. Rather, strategists will start with a customer value proposition and a blank slate for the production and delivery system. There will be nothing to “outsource” because, from the point of view of strategy, there’s nothing “inside” to begin with. Instead, managers, using new tools of strategic analysis, can identify discrete activities that create value and parcel them out to the appropriate b-web partners. A lead firm in a b-web (e.g., Siebel Systems) choreographs the process, acting as a “context provider.”