Do Some Business Models Perform Better than Others? A Study of the 1000 Largest US Firms
Thomas W. Malone,
Victoria T. D’Urso,
Charlie Munger: Invert And Use “Disconfirming Evidence”
Sloan School of Management
Massachusetts Institute of Technology
Despite its common use by academics and managers, the concept of business model remains seldom studied. This paper begins by defining a business model as what a business does and how a business makes money doing those things. Then the paper defines four basic types of business models (Creators, Distributors, Landlords and Brokers). Next, by considering the type of asset involved (Financial, Physical, Intangible, or Human), 16 specialized variations of the four basic business models are defined. Using this framework, we classify the revenue streams of the top 1000 firms in the US economy in fiscal year 2000 and analyze their financial performance. The results show that business models are a better predictor of financial performance than industry classifications and that some business models do, indeed, perform better than others. Specifically, selling the right to use assets is more profitable and more highly valued by the market than selling ownership of assets. Unlike well-known concepts such as industry classification, therefore, this paper attempts to describe the deeper structure of what firms do and thereby generate novel insights for researchers, managers and investors.
Do Some Business Models Perform Better than Others? A Study of the 1000 Largest US Firms – Introduction
Few concepts in business today are as widely discussed—and as seldom systematically studied—as the concept of business models. Many people attribute the success of companies like eBay, Dell, and Amazon, for example, to the ways they used new technologies—not just to make their operations more efficient—but to create new business models altogether. In spite of all the talk about business models, however, there have been very few large-scale systematic empirical studies of them. We do not even know, for instance, how common the different kinds of business models are in the economy and whether some business models have better financial performance than others.
This paper provides a first attempt to answer these basic questions about business models. To answer the questions, we first develop a comprehensive typology of four basic types of business models and 16 specialized variations of these basic types. We hypothesize that this typology can be used to classify any for-profit enterprise that exists in today’s economy. As partial confirmation of this hypothesis, we classify the business models of the 1000 largest US enterprises. Finally, we analyze various kinds of financial performance data for the different kinds of business models to determine whether some models perform better than others.
We find that some business models are much more common than others, and that some do, indeed, perform better than others. For example, the most common business models for large US companies involve selling ownership of assets to customers (e.g. manufacturers and distributors). However, in the time period of our study (fiscal year 2000), these business models perform less well (in terms of both profitability and market value) than business models in which customers use—but don’t buy—assets (e.g. landlords, lenders, publishers, and contractors).
This study does not answer other questions like why these differences exist, whether they are changing over time, or how individual companies can exploit or modify their business models to improve their performance. But we hope that the work described here will provide a foundation for future work on these questions.
Even though the concept of business model is potentially relevant to all companies, our search of the organization, economic, and strategy literatures, found few articles on business models, and no large-scale studies on the topic. Instead several authors have provided useful frameworks for analyzing businesses, such as profit models (Slywotzky and Morrison, 1997) and strategy maps (Kaplan and Norton, 2004). These approaches are based on a long tradition of classifying firms into “internally consistent sets of firms” referred to as strategic groups or configurations (Ketchen, Thomas, and Snow 1993). These groups—typically conceived of, and organized through the use of typologies and taxonomies (e.g., Miles and Snow, 1978; Galbraith and Schendel, 1983; Miller and Friesen, 1978)—are then often used to explore the determinants of performance.
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