Business models, as defined by Joan Magretta (2002: 87), ‘… are at heart stories – stories that explain how enterprises work… They answer the fundamental questions every manager needs to ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?’ She explained that a business model ‘focuses attention on how all the elements in a system fit into a working whole’ (ibid: 90).
It was suggested by Chesbrough (2010: 355) that: ‘A business model articulates the value proposition… and defines the structure of the value chain’. According to Teece (2010: 173): ‘In essence, a business model is a conceptual rather than a financial model of a business’. A major contribution to understanding business models was made by Johnson et al (2008: 52), who stated that: ‘A business model, from our point of view, consists of four interlocking elements that, taken together, create and deliver value’. These four elements are:
- The customer value proposition: how the business will create value for its customers. This is the most important element.
- The profit formula: the blueprint that defines how the company creates value for itself while providing value to the customer. It consists of the revenue model, cost structure, margin model (the contribution needed from each transaction to achieve desired
profits) and resource velocity (how fast the business needs to turn over inventory and assets and how well resources should be utilized).
- Key resources: assets such as people, technology, products, facilities, equipment, channels and brand required to deliver the value proposition to the targeted customer.
- Key processes: recurrent tasks such as training, development, manufacturing, budgeting, planning and sales that allow firms to deliver value in a way they can successfully repeat and increase in scale. Key processes also include a company’s rules, metrics and norms.