Software Business Models

According to Microsoft (2003) three broad business models are adopted by software developer firms. These are: Open Source Software Model; Commercial Software Model and Hybrid Software Model. Each of these models has many sub-types which are based on the different influencing factors. Most of the software developers have traditionally adopted the commercial software model. In recent times due to the influence of open source initiatives both from governments and large firms the trend is shifting towards adoption of the hybrid software model. In the hybrid software model, software that has a higher intellectual involvement is offered under a commercial agreement while that with lesser intellectual involvement is offered under an open source agreement.

The Knowledge Gap

The term business model, though widely used by academics and managers, suffers from a lack of proper understanding of its meaning though it has a close relationship to the corporate strategy. This may be due to the lack of a working definition for business models. Although a few researchers have provided a working definition there seems to be no common agreement on the different definitions proposed or a widely accepted definition for the evaluation of business models (Pateli, 2002). A recent working definition for business model is from Chesbrough and Rosenbloom (2002). The key constituents of the business model according to this definition are: Value proposition based on technology that is offered, the market segments served and the revenue generation mechanism adopted, the structure of the value chain, the cost structure and the profit potential of providing the service, description of the value network and the competitive strategy. Though this definition has been widely applied for research on existing technology innovations it has been sparsely applied for research on new technology innovations to expose the business challenges that need to be managed.

It is imperative to understand that there is no single dominant effect or cost advantage that will provide a long-term sustainable competitive advantage to a business. The choices of operating business model and value plane relationship are based on certain elements that are dynamic in nature (Alt and Zimmermann, 2001). Business model transformation requires reconfiguration of value chains, business processes, organization structure and value offerings (Lee, 2001). Linder and Cantrell (2000) have identified four basic types of change models to manage business model transformations. Based on the extent to which the core logic of the business requires reconfiguration, these are: realization models; renewal models; extension models and journey models. A simple and easy-to-use framework for understanding business models and the change requirements associated with them is lacking in the current literature (Pateli, 2002).

There is paucity of scholarly literature about business models as this area according to Chesbrough and Rosenbloom (2002) “draws from and integrates a variety of academic and functional disciplines, gaining prominence in none.” A similar view has been provided by Hedman and Kalling (2003). According to them “the concept is often used independently from theory, meaning model components and their interrelations are relatively obscure.”

The studies that have been done so far have focused on either the management perspective or have primarily illustrated the functionalities and capabilities of new technology that have influenced the development of new business models. There have not been many studies carried out by social scientists, which have linked these aspects along with the dimension of technological preparedness, helping organizations to understand the alignment issues related to adoption of new technology innovations. A search on 19th August 2005 done on http://www.theses.com/ looking for theses in the area of business models showed 4 results and only one of them by Fendt, 2002 was relevant to this research.

Business Model explained

According to Timmers (1998), “a business model is an architecture for the product, service and information flows, including a description of the various business actors and their roles; and a description of the potential benefits for the various business actors; and a description of the sources of revenues.” Research suggests that new technology innovations influence both the emergence of new business models (Prahalad and Ramaswamy, 2000 and Venkatesh, 1999) and the transformation of existing business models (Chesbrough and Rosenbloom, 2002) often influencing the creation of a new value plane (three-dimensional relationships with technology innovation as the axis - Tovstiga and Fantner, 2000) through the deconstruction of existing value chain relationships. As stated by Evans and Wurster (1997), “existing value chains will fragment into multiple businesses, each of which will have its own sources of competitive advantage.” Operating business models and value chain partnerships undergo changes over time. The revenue generation possibility of a successful model reduces over a period of time, as the value proposition declines and no longer remains distinctive (Westland and Clark, 1999). Hence it is important for businesses to keep a watch on new business opportunities that come along and position themselves to adopt a suitable change model to sustain successful performance for growth (Linder and Cantrell, 2000). The development of strategies for sustainable performance and growth would require the understanding of critical success factors such as the value plane relationships, innovation and knowledge sharing capabilities, customer needs & value offerings, technological roadmap, competitive and cooperative landscape, diffusion characteristics and the alignment of business strategies for the construction of transformed business models.