Business Models as Models to Reflect Reality. How useful are they?

Term Paper, 2016

14 Pages, Grade: 1,7



1. Introduction

2. Theoretical Background: Business Models as Models

3. Business Models as Models to reflect Reality
3.1 Starting Point: From Recipe to Meal
3.2 Serving the Dish: The Restaurant as External Environment
3.3 Business Models and Its Usefulness

4. Conclusion

5. References

1. Introduction

In times of globalisation, the balance between customers and suppliers changed due to numerous developments in communications, IT, transportation, mass production and global trade. Today’s customers have access to a broader and more transparent global supply. This in turn makes it necessary for companies to act more customer-centric in order to meet customer needs and to re-evaluate their own value proposition. Businesses do not only have to focus on value creation but also on value capturing; without a comprehensive and well developed business model (BM hereafter), companies will fail to do so.

This is particularly obvious in entrepreneurs, working in the start-up-sector, who regularly turn their ideas into rubble. At the same time, it is often unclear who accounts for the failure or what probably went wrong with the BM itself. Business model-creators therefore have to ensure that their BMs do not only work on a theoretical basis on paper, but also in reality: A well performing (business-) model should abstract the reality in that way that it contains all (business-)critical aspects and ignores all those which are not critical - true to the motto ‘as much as needed, as little as possible’.

The notion of ‘business model’ has been the focus of substantial attention from both, academics and practitioners since the mid of the 90s and became one of the most important buzzwords during the Internet boom. From 1995 to 2011, there was published an exponentially growing body of around 1,200 articles in peer-reviewed academic journals which deal with the notion of BMs (Zott et al. 2011).

The core concern of this academic essay is to examine the issue of how to make sure that BMs are useful. For that, a notion of BMs proposed by Baden-Fuller & Morgan (2010) is taken up, “ which comes from the practical and technological domain rather than the scientific one ”: They suggest the original concept of thinking BMs as recipes, “ as practical models of technology that are ready for copying, but also open for variation and innovation ” (ibid.). I will develop this idea further and extend it by not only taking up the various ingredients but also the typical characteristics of a recipe as well as the external environment, the final dish is served in.

First, the notion of BMs (as models) will be explained in order to build a profound theoretical background. Afterwards, the original analogy between BMs and recipes will be presented and extended. Based on this idea, the core concern will be discussed: How useful BMs are in order to represent reality and how it can be made sure, that they are useful - especially for practitioners. In the end, there will be a short summary.

2. Theoretical Background: Business Models as Models

As the notion ‘ business model ’ intuitively indicates, it has something to do with modelling but in a business sense. This is in line with Baden-Fuller & Morgan (2010) who argue that BMs function as models in various different forms. Due to that, the attention is first paid on the notion of models which will be specified afterwards to the notion of BMs.

The term ‘ model ’ is highly equivocally and there is no consistent terminology used by scientists and philosophers. While the use of models in science was mostly neglected in the 20th century, the situation thoroughly changed over time. Today, philosophers of science pay a greater attention to the scientific practice and the use of models rather than examining only the nature of scientific theories and laws (Internet Encyclopedia of Philosophy 2016). This results in an overwhelming proliferation of various types of models in the area of the philosophy of science.

At a semantic level, it can be roughly divided into representational models (which primary represent selected parts of the world or illustrate known facts) and models of theory (which represent a theory by interpreting its laws and axioms and by which the context of discovery is on focus).

For the first, it can be distinguished between models of phenomena and models of data. Models of phenomena can be sub-divided into scale models, idealized models, analogical models and phenomenological models. However, each of these is “ still somewhat vague, suffering from internal problems, and much work needs to be done to tighten them ” (Stanford Encyclopedia of Philosophy 2012). Another kind of representational modes are Models of Data which is a “ corrected, rectified, regimented, and in many instances idealized version of the data ( … ) gain[ed] from immediate observation, the so-called raw data ” (ibid.).

For the latter, models of theory, it can be said that these are models in the sense that they are what the theory represents - a structure, making all sentences of a theory true (ibid.).

‘Business’ on the other side is (following the definition of the Cambridge English Dictionary) the activity of buying and selling goods or services, or a particular organisation that does this, or work that one does in order to earn money (Cambridge 2016). Taking this definition and transferring it to the definition of representational models in order to get a first simple understanding, a BM would be a representation of how companies buy and sell goods and services in order to earn money.

In scientific literature however, the notion of BMs is examined from various different perspectives and therefore dozens of definitions where proposed in the last decade1 while, at the same time, scientists do not agree on what a BM exactly is. Writing in this context, Zott et al. (2011) state that the notion of BM is not one concept but many concepts. In the following, a few more, very prevalent, definitions will be presented in order to build an understanding for the term.

The first rough approach of BMs is also represented in Osterwalder’s (2004, p. 15) definition who states (however on an even broader scope) that BMs are “ an abstract conceptual model that represents the business and money earning logic of a company ( … ) [which however] is not a guarantee for success as it has to be implemented and managed ”.

Boons et al. (2013) e.g. claim that - for researchers - a BM is like “ an analytical tool that allows them to assess the interplay between the different aspects that firms combine to create ecological, economic, and social value ” (p. 1). Besides that, it provides also a link between the micro and macro level of the economy. The individual business on the one hand and the whole production and consumption system on the other side, in which it operates.

Magretta (2002) argues from a very practical perspective that BMs are “stories that explain how enterprises work” (p. 4) and therefore include definitions of the customer and the customer value as well as answers on the questions how to make money in the particular business and how to deliver the customer value at an appropriate cost level. This definition is in line with Teece (2010) who notes that a BM defines the way by which the business delivers value to its customers, leads them to pay for this value and convert those revenues into profits: He notes that it “ articulates the logic, the data and other evidence that support a value proposition of the customer, and a viable structure of revenues and costs for the enterprise delivering that value ” (p. 179).

Morris et al. (2005) note that a BM is a “ concise representation of how an interrelated set of decision variables in the areas of venture strategy, architecture, and economics are addressed to create sustainable competitive advantage in defined markets” (p. 727).

Furthermore, they suggest that a BM can be characterised by six fundamental components: value proposition, market/customer, internal capabilities, external positioning, economic factors and personal/investor factors.

In addition, Chesbrough & Rosenbloom (2002) claim from a more technology firm-driven perspective (and focussing on innovation) that a BM is “the heuristic logic that connects technical potential with the realization of economic value” (p. 529).

3. Business Models as Models to reflect Reality

3.1 Starting Point: From Recipe to Meal

To get a deeper understanding why BMs are useful and contribute to a business’s success, the inventive idea of Baden-Fuller & Morgan (2010) is taken up and developed further: they propose to see BMs as analogical models in the shape of recipes. This paper argues that, besides the simple ingredients of the recipe, also the characteristics of the recipe itself as well as the environment - in which the later dish is served - should not be neglected.

For Baden-Fuller & Morgan, BMs define “the business ’ s characteristics and its activities in a remarkably concise way, [ … ] in a way that matches the generic level that defines a kind or type of behaviour [ … ] but that also suggests why it works” (p. 167). In their proposed concept, a BM includes all essential (strategic) elements like resources, capabilities, products, customers, technologies, markets etc. which are reflected in the ingredients. By following the instructions of how to arrange and combine the individual ingredients, the dish is ‘cooked’ (however knowledge of the craft of cookery and expertise is needed in order to be successful). Therefore, the BM as a recipe demonstrates or gives at least an “ advice about how to do something [note: to combine, cook and arrange the individual ingredients] so that the results will come out right ” (p. 166).

Writing in this context but focussing on BM portfolios, Sabatier et al. (2010) name five components which are characterising BMs as recipes. Their suggestions are taken up hereinafter but in some ways re-arranged to show why BMs are useful.

The first component deals with the general classification of a recipe, e.g. into courses (starter, main dish or dessert), price levels (cheap or expensive dish), its basic ingredients (meat, fish or vegetarian dish) but also time (taking short or long time to cook) or required ‘basic’ tools (oven, water bath, freezer). Moreover, a BM can be classified or characterized in various dimensions, e.g. a slow or fast growing business, its perceived risk or the sector, the business is embedded in.

The second element, characterising a recipe, is the list of ingredients and its quantities which also determines the purchase and the actual cooking process. However, referring to the dynamic aspect of BMs which opens them for variations and innovations (see Baden-Fuller & Morgan 2010; Demil & Lecocq 2010), the list can be flexible. Furthermore, it represents the crucial resources of the BM, required to effectively operate in reality.

Third component is the description of the various stages of a recipe: from the preliminary preparations to the final dish which can be served. To successfully follow these incremental steps, profound knowledge (cooking skills) and tools (e.g. knifes, saucepans etc.) are essential. In addition, a description of the processes is required, that is on the one hand concise but on the other hand detailed enough to be reliably replicable (containing all business-critical aspects) and easy to understand. The incremental process of a recipe refers to the implementation order of the BM. This regularly starts with a first roughly outlined concept, a blueprint, and goes on (when a new BM is developed) with a trial-and-error process, forming the shape of the business. The final BM, developing from the trial-and-error process however has (as every good dish!) to be modified in terms of being tasted and seasoned. This has to be done not only when the BM is copied (following an existing recipe) but also over time in order to meet a possibly changing environment (customer needs, market conditions etc.).

The fourth element is the illustration or photography of the final dish as a kind of serving suggestion. This “ ex-ante representation ” (Sabatier et al. 2010; p. 434) illustrates the cook, while dressing the final dish, how to serve it. Relating to the BM, this takes up Baden-Fuller & Morgan’s idea of “ ideal-type business model examples ” (p. 166) whose proof of concept is already provided but usually makes minor variations to the BM necessary in order to successfully implement it.

The fifth component are - for the case that a firm is applying several BMs at the same time - the other dishes of the whole menu which stand in interrelation to each other as well as in interdependency to the corresponding drinks (e.g. wines). By using the European biopharmaceutical industry as a reference, Sabatier et al. (2010) argue that especially very successful biotech companies generate “revenues by implementing several different business models simultaneously to serve different customers ” (p. 432) and therefore hold a ‘portfolio’ of BMs (analogised in that context as a dinner).

1 see i.a. Timmers 1998; Amit & Zott 2001; Chesbrough & Rosenbloom 2002; Magretta 2002; Morris et al. 2005; Osterwalder 2004; Johnson et al. 2008; Osterwalder & Pigneur 2010; Casadesus-Masanell & Ricart 2010; Teece 2010; Zott & Amit 2010; Demil & Lecocq 2010; Sabatier et al. 2010; DaSilva & Trkman 2013


Excerpt out of 14 pages


Business Models as Models to Reflect Reality. How useful are they?
University Witten/Herdecke
Philosophy of Science
Catalog Number
ISBN (eBook)
ISBN (Book)
File size
533 KB
Philosophy of Science, Philosophy, Wissenschaftstheorie, Wirtschaft, Business Models
Quote paper
André Euschen (Author), 2016, Business Models as Models to Reflect Reality. How useful are they?, Munich, GRIN Verlag,


  • No comments yet.
Look inside the ebook
Title: Business Models as Models to Reflect Reality. How useful are they?

Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free