Business Model Schema

Some folks at MIT’s Sloan school have cobbled together a scheme for organizing the universe of business models.  I recall reading a lot of this work some years ago and coming away unsatisfied, and so I apparently I never wrote any blog postings about it.  Which is a bit of a shame because it runs close to one of my fantasies, e.g. that it would be fun to write a field guide to local businesses which would mimic the field guides of the natural world.  Then upon observing some business in the wild, say the handful of regulars who beg at the intersection of Mass Ave and Route 16 at the Cambridge Arlington line you could look them up and puzzle out what combination of property rights, regulation, etc. etc. makes that an ongoing proposition.

You can get a taste for the schema from this article: Do Some Business Models Perform Better than Others? A study of the 1000 Largest US Firms.  In an open natural system schemes principally about exceptions and yet the power law nature of those same systems makes for the appearance of large scale regularities.  Those regularities are kind-a-sort-of mimic the organizational frames seen in biology, e.g. kingdom, phylum, class, order … species.  But unlike biology you can create bizarre hybrids.

With that caveat in mind – the primary organizational schema the MIT folks distilled out for business models is has two primary dimensions.

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.

Collect the whole set!  For example WalMart’s business model is, at first glance, about physical assets which they distribute.  Headhunters are brokers of human assets.  Advertising agencies are creators of intangible goods.  Etc. etc.  And of course a complex firm is likely to have portions that fall into many of these slots.

The first dimension picks out what kind of property rights the business is selling and they have this little cross tab for that.

What rights are being sold
How much does the business transform the asset?
limited significant
Ownership of Asset Creator Distributor
Use of Asset Landlord
Matching of buyer and seller Broker

Which raises obvious questions about how firm these categories are. Why isn’t useful to split the Landlords into two kinds, those who add significant value v.s. those who don’t? Or is it actually rare to find matching businesses (i.e. two sided networks) which also play in another category.  Also notice how terms, like creator, become formal and are only loosely connected to their colloquial meaning.  Otherwise, it’s pretty insulting to announce that creators don’t significantly transform the assets when they do their business.  Another example of that problem is how they plug the term Entrepreneur into just one of cells in their four-by-four grid (e.g. creator/financial); which is just silly if you believe that entrepreneurship is the more general activity of creating new institutions.  Actually they quickly ran out of good labels to drop into their four-by-four grid; as you can see:

Financial Physical Intangible Human
Creator Entrepreneur Manufacturer Inventor Human Creator
Distributor Financial Trader Wholesale/Retailer IP Trader Human Distributor
Landlord Financial Landlord Physical Landord Intelectual Landlord Contractor
Broker Financial Broker Physcial Broker IP Broker HR Broker

2 thoughts on “Business Model Schema

  1. Mansoor

    Interesting writeup. So what are you proposing that can replace or improve the MIT model.

    I think they have an excellent start that maybe perhaps good for a research paper but not helpful if you are dishing out companies from your portfolio or assessing the trending.

  2. bhyde Post author

    Mansoor – I found their model interesting, and that’s why I posted about it. I haven’t thought much about what I’d propose as an alternate model.

    If your interesting is investing you might find some of their observations about firms in the various categories interesting.

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