Business Model Framework

The Business Model Framework is a rigorous building-block-like methodology that defines the essential concepts in e-business models and shows the relationships between them. Our framework has been inspired in some ways by the different enterprise ontology projects described in academic literature (Toronto Virtual Enterprise, Enterprise Ontology, Core Enterprise Ontology) (Bertolazzi et al., 2001). These ontologies mainly concentrate on processes and organizational representation. The work of the Edinburgh Group (Ushold, 1995), for example, is aimed at proposing enterprise ontology, i.e., a set of carefully defined concepts that are widely used for describing enterprises in general and that can serve as a stable basis for specifying software requirements. The group has developed tools for modeling, communicating and representing enterprises and processes in a unique way. The focus of this work is on the logic and concepts of value creation, at a higher level of abstraction, which is the business model. This allows a much better and more structured transfer of business knowledge to entrepreneurs in developing countries.

Our Business Model Framework is the conceptualization and formalization into elements, relationships, vocabulary and semantics of the essential issues in the business model domain. The framework contains several levels of decomposition with increasing depth and complexity. On the following page, we describe the first and second level of decomposition.

The Business Model Framework is founded on four main pillars:

• The products and services a firm offers, representing a substantial value to the customer, and for which he is willing to pay.

  Name of BM-Element	e-BUSINESS MODEL FRAMEWORK (root element)
  Consists of	PRODCUT INNOVATION CUSTOMER RELATIONSHIP INFRASTRUCTURE MANAGEMENT FINANCIALS
  Level of decomposition	0 (root element)

• The infrastructure and the network of partners that is necessary in order to create value and to maintain a good customer relationship.

• The relationship capital the firm creates and maintains with the customer, in order to satisfy him and to generate sustainable revenues.

• The financials, which are transversal and can be found throughout the three former components, such as cost and revenue structures. The four main elements are then further decomposed (see Figure 1).

  
  Figure 1: Business Model Framework

Product Innovation

The Product Innovation pillar of the framework covers all product-related aspects. The main elements are the value proposition a firm wants to offer to specific target customer segments and the capabilities a firm has to be able to assure in order to deliver this value. This is described on the following page.

Target customer segment. The value proposition a firm offers on the market should target a specific customer segment. The arise of new affordable communication technologies such as the Internet, have given firms in developing countries access to completely new markets. If companies had to pass by several intermediaries to access the final clients for their products and services in the past, they can now often address them more directly. For example, Chincheros, a small village in Peru, increased its income five-fold to US$1,500 per month when the village leaders formed an Internet-enabled partnership with an export company in 1996. The village vegetables are now sold daily in New York (DOI, 2001). Through PEOPLink's global artisans trading exchange ^[2] local craftspeople in developing countries are increasing their incomes particularly because the wholesaling intermediaries for their produce have effectively been removed. They now receive up to 95 percent of the selling price for their produce, when previously they received only 10 percent (DOI, 2001). Several similar initiatives, offering indigenous peoples opportunities to globally market their traditional crafts and farm products exist on the Web (World Bank, 2002). In general, the Internet could erode an important advantage now enjoyed by firms in industrial countries: proximity to wealthy customers (World Bank, 2001).

Name of BM-Element	PRODUCT INNOVATION
Child of	Root Element: Business Model
Consists of	TARGET CUSTOMER SEGMENT VALUE PROPOSITION CAPABILITIES
Level of decomposition	1
Related to	Marketed through CUSTOMER RELATIONSHIP Based on INFRASTRUCTURE MANAGEMENT

Value proposition. This refers to what business the company is in and what bundle of products and services it offers on the market. It is important for firms and entrepreneurs in developing countries to understand that ICT opens them up a whole new world of opportunities. For example, rather than exporting products over the Internet, which demands an efficient and functioning logistical infrastructure, they could export digitally deliverable services. In e-transcription or e-editing, firms would receive audio files over the Web, split them into sections and format them by several employees in a parallel working mode. The electronic document could be returned in 24 hours. A one-hour tape, which equals about five to six typed pages, goes at US$60 to 100 per hour in North America (Rostenne, 1999). Another often-cited example is the case of Indian firms that rely on cheap software developers or accountants to provide outsourcing services to Western firms, particularly to multinationals. Further, through customization (Piller, 2000) firms could propose value tailored to the demand of a single customer. Small firms in developing countries have a substantial competitive advantage if they provide customized handmade products or customer-tailored services at low prices. The Internet makes it possible for a tailor in Shanghai to hand-make a suit for a lawyer in Boston and then FedEx it to him (The Economist, 2000).

Capabilities. To deliver a value proposition, firms must be conscious that they have to possess the range of capabilities that underpin the proposed value. This is particularly important for firms in developing countries, where ICT infrastructure and general infrastructure are not always satisfying and still often very expensive.

Infrastructure Management

The Infrastructure Management element, describes the value system configuration (Gordijn et al., 2001) that is necessary to deliver the value proposition. This comprises the value configuration of the firm, in other words the activities to create and deliver value, and, the relationship between them, the in-house resources and assets and the firm's partner network.

Value configuration. The main purpose of a company is for the creation of value for which customers are willing to pay. This value is the outcome of a configuration of inside and outside activities and processes. To define the value creation configuration in a business model, there are three basic trajectories. The first is the value chain framework by Porter et al. (1985) and its extension, as defined by Stabell et al. (1998), who add the concept of the value shop and the value network. Understanding the value creation process is indispensable for streamlining business and for identifying the right software and Internet tools. Firms in developing countries can also benefit from the Open Source software movement that delivers powerful, cheap ICT tools.

Resources and assets. In order to create value, a firm needs resources (Wernefelt, 1984). Grant (1995) distinguishes tangible, intangible, and human assets. Companies in developing countries have to analyze where they have competitive advantages, in order to focus on a precise and limited range of resources and assets. For everything else, ICT opens up new ways of partnering and outsourcing.

Name of BM-Element	INFRASTRUCTURE MANAGEMENT
Child of	Root Element: Business Model
Consists of	RESOURCES ACTIVITY CONFIGURATION (or VALUE CONFIGURATION) PARTNER NETWORK
Level of decomposition	1
Related to	Resource for PRODUCT INNOVATION Resource for CUSTOMER RELATIONSHIP Cost for FINANCIALS

Partner network. The partner network outlines which elements of the activity configuration are distributed among the partners of the firm. Shrinking transaction costs make it easier for firms to vertically disintegrate and to reorganize in partner networks. CatGen, for example, provides software that enables local artisans to easily capture and transmit digital images of products over the Internet with minimal training and in conditions of poor connectivity. The solution is feasible due to the existence of public access points such as cyber cafes and telecenters (infoDev, 1998).

Customer Relationship

Through the use of ICT firms can redefine the notion of Customer Relationship. First, they can get a feel for and understand the customer by outlining an information strategy. Second, firms can exploit new ways to deliver value and expand reach by covering new and multiple channels. Third, companies must understand that trust and loyalty has become one of the most important elements in a business world that is increasingly a virtual one and has less face-to-face contact. This is described at the bottom of the page.

Information strategy. Collecting information on customers and their behavior has become essential for understanding the market and offering adequate products and services. Better knowledge of its customers allows a firm to establish a personalized relationship tailored to the needs of every single customer. However, companies in emerging markets are often wary of introducing continuous-relationship marketing because of the sophisticated IT systems, customer records, and marketing expertise it is said to require. In reality, things are not as complicated, as shown by Chung et al. (Chung et al., 2002). One mobile-phone operator in Asia, for example, cut customer churn by more than 40 percent by offering a special discount to just the customers identified as the most likely to cancel. An East Asian retail bank increased its credit card profits by targeting a direct-marketing campaign at high-income customers who were heavy ATM users, having discovered through the use of CRM that they were four times as likely to take up a credit card offer as the people in a control group.

Name of BM-Element	CUSTOMER RELATIONSHIP
Child of	Root Element: Business Model
Consists of	INFORMATION STRATEGY FEEL & SERVE TRUST & LOYALTY
Level of decomposition	1
Related to	Feedback for PRODUCT INNOVATION Based on INFRASTRUCTURE MANAGEMENT Income for FINANCIALS

Feel & Serve (channels). This element refers to the way a firm "goes to market" and how it actually "reaches" its customers (Hamel, 2000). As shown above, direct selling over the Web can improve margins and selling through new Internet mediation services, so-called cybermediaries (Sarker et al., 1995) can mean new market opportunities. AfricanCraft.com ^[3] is a Web site dedicated to bringing the arts and the artisans of Africa online. By supplying information on online shops, craftspeople, artists and designers in Africa, and by setting up on-line classrooms on subjects such as Kente paper weaving or loom construction, this Web site positions itself as a portal for African craftsmanship. This illustrates one of the best known and mostly applied aspects of e-business: providing information on products and value-added services over a Web site. A firm can easily supply its customer with a wide range of basic information on products, prices and availability, or even offer him customized real-time information (i.e., delivery status, product lifecycle management). African countries for example, could have stopped their diminishing export performances, which were largely attributed to non-prices factors on the demand side (Oshikoya et al., 1999), if they had used the Internet for marketing information on prices and used the Web for after sales services and quality amelioration. A successful example of a new cybermediary is the Chinese Web site, alibaba.com, which matches international customers with Chinese suppliers. This is very helpful for Chinese manufacturers that often have little knowledge of how to address international export markets.

Trust & Loyalty. For businesses in developing countries it is indispensable to find ways to establish trust between business partners if they want to survive in the virtual market space, particularly if they are in the export business. In online auctions, more often than not a lack of credibility makes it difficult for firms in developing countries to access customers. Purchasers need to have confidence that suppliers will provide input on time and in conformance with specifications, and product quality may not be known ex ante. More than half of 35 large firms using online auction or exchange sites said that they would not do business through online Web sites with firms they did not know (Forrester Research, 1999). Interview results indicate buyers—typically firms in industrial countries—see an especially high risk in purchasing from firms in developing countries (World Bank, 2001). Therefore it is important to use the existing mechanisms to build trust in e-business environments, such as virtual communities (Hagel et al., 1997), performance history, mediation services or insurance, third party verification and authorization, and, clear privacy policies (Friedman et al., 2000). Finally, customer loyalty emerges out of the customer's trust and satisfaction.

Financials

The Financials, the last pillar of our framework is transversal because it is influenced by all other pillars. This element is composed of the revenue model of the firm and its cost structure. The formerly mentioned determine the firm's profit or loss and therefore its ability to survive in competition.

Revenue Model. This element measures the ability of a firm to translate the value it offers its customers into money and therefore generate incoming revenue streams. Firms can compose their revenue model of different revenue streams that can all have different pricing models. Companies in developing countries must understand that the Internet has had an important impact on pricing and has created a whole new range of pricing mechanisms (Klein et al., 2000).

Name of BM-Element	FINANCIALS
Child of	Root Element: Business Model
Consists of	REVENUE MODEL COST STRUCTURE PROFIT/LOSS
Level of decomposition	1
Related to	Resource for INFRASTRUCTURE MANAGEMENT Funded through CUSTOMER RELATIONSHIP

Cost structure. This element measures all the costs the firm incurs in order to create, market and deliver value to its customers. It sets a price tag on all the resources, assets, activities and partner network relationships and exchanges that cost the company money.

Profit/Loss. This element is simply the outcome of the difference between the revenue model and the cost structure. It can be seen as the culminating point and as an expression of the entire business model. Whereas product innovation and customer relationship shall maximize revenue, an effective infrastructure management shall minimize costs and therefore, optimize the profit model.

^[2]http://www.peoplink.org/EN/0.html. Retrieved on August 7, 2002.

^[3]http://www.arficancrafts.com. Retrievd on August 7, 2002.