Business Model Innovation and the Balanced Scorecard

Business Model

Strategy scholars have described the business model as the logic and rationale for creating economic value in an organization for the benefit of its stakeholders. For example, Casadesus-Masanell and Ricart (2010) characterized the business model as a locus of innovation, planning tool, heuristic logic, or market device. Amit and Zott (2001) defined it as the content structure and governance of transactions designed to create value by exploiting business opportunities. The business model defines the total value created in transactions from a firm’s products and services (Zott & Amit, 2010) and provides a coherent framework that takes technological characteristics and potentials as inputs and converts them through customers and markets into economic outputs.

Chesbrough and Rosenbloom (2002) outlined the basic functions of the business model:

• 1.

  Articulate the value proposition, i.e. the value created for users by offering based on the technology;

• 2.

  Identify the market segment, i.e. the users to whom the technology is useful and for what purpose, and specify the revenue generation mechanisms for the firm;

• 3.

  Define the structure of the value chain within the firm required to create and distribute the offering, and determine the complementary assets needed to support the firm’s position in this chain;

• 4.

  Estimate the cost structure and profit potential of producing the offering, given the value proposition and value chain structure chosen;

• 5.

  Describe the position of the firm within the value network linking suppliers and customers, including identification of potential complementors and competitors;

• 6.

  Formulate the competitive strategy by which the innovation firm will gain and hold advantage over rivals (pp. 533-534).

Collectively these functions provide justification for the financial capital needed to realize the model and help the organization define a direction to take.

The traditional organization business model was focused on adhering to pre-specified plans to ensure efficiencies and achieve established goals (Malhoutra, 2001). However, this model was best suited for more stable and predictable environments. Organizations faced with more dynamic and uncertain environments have been forced to reevaluate their traditional business models and best practices. Many successful organizations have refocused their efforts on knowledge management systems for BMI. The application of this framework enables organizations to develop new business models that are more flexible, adept, and adaptive to the ever-changing environment. BMI enables organizations to create new markets or transform existing markets into significant market value and have an impact on the long-term success of a company (Comes & Berniker, 2008). Managers who understand their organization’s business model have better insight into metrics and management levers. BMI can create tremendous growth, reshape companies and industries, and redistribute billions of dollars of value.