Three generic types of business models [primal]

Through reading Clayton Christensen’s book Disrupting Classroom, I came across Christensen’s explanation of a framework for business models developed by Charles B. Stabell and Øystein D. Fjeldstad[1].  This framework is simple yet powerful at explaining how different organizations deliver value to their customers. This primal post is rather business-generic; in the associated dual post, I will provide examples of each business model from the Operations Research world.

The Value Chain

This configuration is paramount in operations management and industrial engineering textbooks, and has been extensively studied by Porter’s work. It’s also called Value-Adding Process (VAP) in Christensen’s work. The Value Chain brings various inputs (such as raw materials and energy) and transforms them into products and goods which have a higher value, then delivers these products to different customers. In order for the chain to be cost-effective, processes must be streamlined and standardized, variable costs need to be drilled down whenever possible and capacity must be carefully acquired and must not be “wasted”, i.e. unused. This network is driven by the concepts of economies of scale and scope, and thus, tends to form extremely large and rigid organizations. Most manufacturing companies, from Procter & Gamble to General Motors, fall under this category.

The Solution Shop

The shop employs a relatively small number of experts and makes the best use of the motto “there is no substitute for expertise”. A shop is expert as solving their customers’ most complex problems, often through a mix of experience, ingenuity and innovation. According to Christensen, they diagnose problems and recommend – and sometimes implement – solutions. Since the shop relies so much on the expertise of its staff, these business don’t tend to grow fast. Graduate education, research teams and consulting firms are example of shops.

The Faciliated Network

The third type of business models consists of creating links between different customers. In this model, the key player is not the creator nor the owner of the value bought by a customer: it merely provides the platform for the exchange to happen. In a network, a person or an organization is often simultaneously a customer and a supplier. The organization that makes the more money in a network isn’t necessarily the owner of the infrastructure, but rather the facilitator, the one that makes the exchange as simple and effective as possible. The value of the network is often positively correlated with the number of participants. Examples include the insurance market, EBay’s online auctioning platform and Google’s ad management system.

[1]Charles B. Stabell and Øystein D. Fjeldstad. 1998. Configuring value for competitive advantage: on chains shops, and networks. Strategic Management Journal, Vol. 19, 413–437.

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  1. […] a previous primal post, I have described three generic types of value creation configurations: the shop, the chain and the network, as characterized in Stabell […]

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