Information Management for Digital

Business Models
Lecture 2: Digital Business Models

Prof. Jens Grossklags, Ph.D.

Professorship of Cyber Trust
Department of Informatics
Technical University of Munich

May 11, 2022

Digital Business Models
Learning Objectives
1. You understand the benefits of models and know the
common elements of models.
2. You are able to create models and analyze business
models.
3. You understand the principles of business model
innovation and are able to draw connections to the
digital transformation.
4. You understand the concept of business model
patterns.
3
Agenda

I. Models and Modeling

II. Business Models

III. Business Model Innovation

IV. Business Model Patterns

4
 Models: Different Degrees of
Abstraction and Realism
Fashion
model Molecular model
To represent To represent
a role or fundamental building
idealized blocks of the physical
form world

Process
Map as a model
model
To present
To represent sequence of
distances, activities in a
topography etc.
Why are we using company
models?
5
Why Models?
• Models reduce complexity: so that we can grasp it
• Abstraction of the real world: to focus on important
aspects that we want to know
• A model is always a model
– About what? (object)
• Physical properties, economic processes, human choices
– For whom? (target group, recipient)
• Management, marketing personnel, technical staff
– For what purpose?
• Decision-making (number of product versions, interface design)
6
 Elements of a Model
Abundant Attributes Model
(= superfluous, redundant)
Adapted from: Stachowiak (1973, S.157)
Target Group, Purpose, Time
English description of some elements of
Stachowiak‘s material:
https://modelpractice.wordpress.com/
category/series/herbert-stachowiak/

What we
want to model
Modell

Note about abundant attributes:

Typically do not correspond to any
attributes in the Original.
Original Omitted Attributes Mapping Rules Used primarily as technical
(Real world) (incl. syntax, notation) ‘hypothetical bridge-over’
constructs chosen for
presentation and explanation.
Model of what? (Object, Time) Model for what? (Purpose) Model for whom? (Recipient)

7
Model Disambiguation:
ACTUAL Model / TARGET Model
• Descriptive ACTUAL Model (as-is model)
– Modeling real systems
– Purpose: Acquire information about a specific system
(assuming that the system is in a static state)
Comparing actual with target model helps
to understand degree of change required,
and expected impact of changes

• Prescriptive TARGET Model (to-be model)

– Modeling future design alternatives
– Purpose: Active design of the organization and IT structure of
an enterprise
Source: Schwarzer/Krcmar (2014), pp. 94f. 8
Using Models to Solve Problems
Descriptive (as-is) model Modification Prescriptive (to-be) model
(Mapping) of the model (Prototype)

Application
Modeling
(implementation)

Direct
Actual State Target State
modification

Why the additional effort of the “modeling detour”:

- Avoid unintended (side-)effects
- Evaluate different options
- Better communicate with recipients
(e.g., tool for teaching staff and management, Source: Leimeister (2012)
explain benefits of moving on from status quo) 9
Modeling Steps
Part of
Reality:
Actual
Re-construction /
State
Modeling / Mapping

Change/
Create
Actual
Reality:
Model
Target
State

Implementation/ Imagination/
Construction Target Modification
Model

Source: Schwarzer/Krcmar (2014), p. 96

10
How to “Build an Economic Model
In Your Spare Time”- First Steps
• Getting a good idea, just get lot of ideas and disregard
bad ones, sources are newspapers, magazines, TV,
conversations,.. study existing data
– … or business need
• Is our idea worth pursuing? Yes, if phrased in
a way that is understood by non-experts
• Is it interesting? Think of the opportunity cost.

Source: Hal R.Varian (2017) https://people.ischool.berkeley.edu/~hal/Papers/how.pdf

http://www.eco.uc3m.es/~mkredler/ReadGr/FeijooOnVarian97.pdf 11
How to build an Economic Model,
Next Steps I.
1. Rely on your Creativity: Don’t look at literature too soon.
2. Building the model: constraints, work an example, keep
on working with alternative examples, write down the
model  Important rule: keep it simple
3. Generalize the model: understand key pieces and use
tools/techniques from the initial model
4. Making mistakes: Back and forth process. Most of the
work consists on subtracting things, not adding them
Source: Hal R.Varian (2017) http://www.eco.uc3m.es/~mkredler/ReadGr/FeijooOnVarian97.pdf
12
How to build an Economic Model,
Next Steps II.
5. Search the literature: tell others about your approach,
learn from mistakes
6. Don’t lose perspective. Get independent judgement for
your model
7. Talk about your model, formally or informally, to small or
large audiences
8. When to stop? Stop when you have made your point.

Source: Hal R.Varian (2017) http://www.eco.uc3m.es/~mkredler/ReadGr/FeijooOnVarian97.pdf

13
Summary:
Useful Aspects of Modeling
– Create transparency about elements and relationships
within an enterprise
– Can be used to explain how an enterprise works
– Facilitate education and communication within an
enterprise
– Can be used to visualize and analyze different alternative
(organizational and technical) solutions
– Facilitate change

Source: Schwarzer/Krcmar (2014), pp. 94f.

14
Layers of Information Management

Business Management: What

Inform, Decide, Control

Information Economy: Information supply and demand

Information Systems: Socio-technical systems How

Information and Communication Technology

15
Different Types of Models in IM

Ecosystem

Business

Service

Architecture

Processes

Data

16
Agenda

I. Models and Modeling

II. Business Models

III. Business Model Innovation

IV. Business Model Patterns

17
Why was WhatsApp actually that
valuable (for Facebook)?
Digital Business Models

Compare news headlines from Forbes

WhatsApp Inc.

• Headquarters: Mountain View,

California
• Active users in 2014: 600 million
• Active users in Q1/2020: 2 billion
• Revenue Q2/2014: $15.9 million

Acquired by Facebook for $19 billion in 2014

Source: Statista.com, accessed at April 28, 2021 19

 Facebook bought WhatsApp

CNN News video from 2014

(6 minutes)

Interesting discussion
on the “pure”
business model from
WhatsApp

Watch video available at: https://www.youtube.com/watch?v=cT1Rjzs5Ul8

20
Why was WhatsApp actually
Considered that Valuable?
• WhatsApp had both offensive and defensive value to Facebook: Own the next Facebook
and prevent the next Facebook
• User base of WhatsApp was already large with 600 million users in 2014, and growing
– Growth turned out to be significant with 2 billion users in 2020
• Trend towards mobile messenger apps: WhatsApp was the most used messenger in
“Emerging Markets“ such as India, Brazil, Mexico, several African markets; but also Europe
• Many adolescents preferred exchanging private messages rather than using social networks
(while parents might watch them on Facebook)
• WhatsApp had very low costs, so one could predict it to be wildly profitable: Only 55
employees

• But currently “pure” business model: no advertisements, no sales of customer data, privacy-
preserving technology (end-to-end encryption)
Background Information
21
 Discussion
Facebook struggled with WhatsApp business model since 2014
Business Model – What is it actually?

Peter Drucker‘s Question:

Who is the customer,
What does he value, and
How does an organization
intend to earn money?

Source: Drucker 1954; Magretta 2002, wishtank.org

23
Business Model Definitions
Schools of Thought
Technology /
E-Commerce Strategy Innovation
Management
“The business model is an
architecture of the
product, service and
information flows, “The business model is the
“A business model
including a description of heuristic logic that
describes the rationale of
the various business connects technical
how an organization
actors and their roles; a potential with the
creates, delivers and
description of the potential realization of economic
captures value.”
benefits for the various value.”
business actors; a
description of the sources
of revenues.”

Timmers 1998 Osterwalder/Pigneur 1998 Chesbrough/Rosenbloom 2002

24
 “capturing value” is not a trivial task, e.g., fallacy of dotcom era: growth does not equal revenue
Elements of a Business Model

The Customer
The Magic Triangle
• Who are our target customers?
What?
The Value Proposition
Value
• What do we offer to customers? Proposition

The Value Chain Who?

Revenue Value
• How is the value proposition created? Why?
Model Chain
How?

The Profit Mechanism A Business Model is a blueprint of how a

company creates and captures value
• Why does it generate profit?

Source: Gassmann et al. (2014) The Business Model Navigator

https://zework.files.wordpress.com/2014/03/st_galler_business_model_navigator.pdf
25
Business
Model
Canvas

Magic
Triangle

Business Model Representations - Täuscher & Abdelkafi (2017) 26

Visual Tools for Business Model Innovation: Recommendations from a Cognitive Perspective
Business Model Canvas
Value Strategic management template
Value Chain Focus on customer
Proposition used for developing new and
documenting existing business
models

Source: Osterwalder and Pigneur (2010, 44)

Profit
Mechanism
27
 Example: Document an Existing
Business Model
• ShareNow carsharing service offered by BMW Group and Daimler AG
– Founded as DriveNow in 2011, merged with car2go (Daimler AG) in 2019
• Available in 18 European cities (7 in Germany)
• 3,000,000 registered users + 16% growth in 2020
• > 11,000 vehicles in use (~2,900 electric cars)

Update 2022:
• Sale to Stellantis
(Fiat, Peugeot, Opel)
• Departure from business
model oriented on
mobility services
Source: https://brandhub.share-now.com/web/6570a0eb69e15b2f/factsheets/ accessed at April 28, 2021
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29
Business Model Canvas: ShareNow
Discussion about 2022 sale:

• Was “giving up”

the right strategic decision
BMW
Flexibility by Daimler and BMW?

• What would have been ideas

Insurance for Business Model
companies
Innovation?
Internet
• But: Mobility services are a
Daimler hot area with innovative
examples such as Mobileye,
Waymo, Pony.ai; partly new
focus on autonomous driving
Fuel

Example above is keyword-based; of course, a solution can be more expressive 30

Agenda

I. Models and Modeling

II. Business Models

III. Business Model Innovation

IV. Business Model Patterns

31
Definition of Business Model
Innovation
A business model innovation creates new logic regarding
how a company creates or captures value by making
changes in the What, Who, How and/or Why

New facet of the product/service?

What?

Value New customer group?

Proposition

New way of payment

(e.g., subscription)? Who?
New delivery channel?
Revenue Value Chain
Model
Why? How?

Gassman et al. 2014: The Business Model Navigator

32
Example: BMW  ShareNow
Previously and still ongoing: Producing and selling cars

Mobility as a service

What? Non-owners of cars (cannot afford a car

or do not want the responsibility,
Value people with occasional mobility needs);
Proposition
Minute-based fee tourists
(plus monthly fee)
Who? Still producing cars,
Revenue Value Chain but now also have to
Model develop application,
Why? How?
and maintain service,
fleet management
33
New Business Models Allow for
Additional Innovation Potential
Additional innovation potential Example:
Innovation
Potential through business model innovation
Charge per view;
Business Model make content
Innovation interactive etc.
Process Innovation
(harvesting internal Optimize movie
innovation opportunities) delivery (cheaper
and better CDN)
Product Innovation
(improving tangible Sell digital version
aspects of a product) of a movie

Time

Note: innovation potential tapers off over time Grassman et al. 2014: The Business Model Navigator 34
However, Business Model
Innovation is Difficult
• Despite well-known examples, radical transformation
remains elusive, exceptions are
• Apple iTunes and music industry
• Uber and the taxi industry

Business Model subsumes a vast scope, multiple interdependencies

and side effects. Therefore, changing or innovating a business model
remains a complex and challenging task.

• Digitalization facilitates incremental transformation

through enhanced products and services, and unlocking
new revenue streams 35
But Radical Changes are Happening

Waves of digital change are occuring closer and closer together

Source: www.digitaltransformationbook.com

36
Business Model Innovation
Through Digital Transformation:
5 Archetypes
1. Reinventing Industries
2. Substituting Products and Services
3. Creating New Digital Businesses
4. Reconfiguring Value Delivery Models
5. Rethinking Value Propositions

Source: Westerman et al. (2014) ‘Leading Digital: Turning Technology into Business Transformation’
37
Business Model Innovation Through
Digital Transformation:
5 Archetypes - how to create value
1. Reinventing Industries - involves a substantial reshaping
of an industry structure, or responding to fundamentally
new consumer behaviors
2. Substituting Products and Services - when your core
products or services become directly substitutable by a
new digital format

Source: Westerman et al. (2014) ‘Leading Digital: Turning Technology into Business Transformation’
38
Business Model Innovation Through
Digital Transformation:
5 Archetypes - how to create value
3. Creating New Digital Businesses - involves the creation
of new products and services that generate additional
revenues
4. Reconfiguring Value Delivery Models - recombining
products, services, and data to change the way a firm
plays in the value chain

Source: Westerman et al. (2014) ‘Leading Digital: Turning Technology into Business Transformation’
39
Business Model Innovation Through
Digital Transformation:
5 Archetypes - how to create value
5. Rethinking Value Propositions - using new digital
capabilities to target unmet needs for existing or new
customers

Source: Westerman et al. (2014) ‘Leading Digital: Turning Technology into Business Transformation’
40
Agenda

I. Models and Modeling

II. Business Models

III. Business Model Innovation

IV. Business Model Patterns

41
Pattern  Business Model Pattern

Pattern in architecture is the idea of capturing architectural

design ideas as archetypal and reusable descriptions.
Christopher Alexander
University of California, Berkeley

A business model pattern is a blueprint to creating new

ideas and achieve business model innovation as a means
to create lasting competitive advantage.
42
Business Model Patterns:
Gassmann et al. (2013)
Systematic analysis of successful business model innovations over
the past 50 years
− 55 successful business model
patterns identified Title

− 300+ business models could

Examples
be fit into these patterns
− Allows for recombination of existing ideas Description
and concepts (from other industries)
− Serve as blueprints for business Business Model
Elements
model innovation efforts
43
44
Freemium
https://businessmodelnavigator.com/pattern?id=18
The basic version of an offering is given away for free in the hope of eventually
persuading the customers to pay for the (costly) premium version. The free offering
is able to attract the highest volume of customers possible for the company. The
generally smaller volume of paying ‘premium customers’ generate the revenue,
which also cross-finances the free offering.

Examples:
What?
Network effects:
Customers (including Value • Hotmail (1996)
Proposition
paying premium users) • Survey-Monkey (1998)
may also derive value Who? • LinkedIn (2003)
from non-paying users, Revenue Value • Skype (2003)
Model Chain
e.g., because of a larger Why? How? • Dropbox (2007)
network size

45
Add-On
https://businessmodelnavigator.com/pattern?id=1

The core offering is priced competitively, but there are numerous extras that drive the
final price up. In the end, customers typically pay more than they initially may have
assumed. Customers benefit from a variable offer, which they can adapt to their
specific needs.

Illusion of cheap price: What?

Examples:

Search engines may Value

• Ryanair (1985)
Proposition
list a cheaper product
• SAP (1992)
higher in its rankings Who?

Revenue Value
Problematic from a Model Chain
Why? How?
consumer protection
point of view
(e.g., bait-and-switch,
“dark patterns”)
46
Affiliation
https://businessmodelnavigator.com/pattern?id=2

The focus lies in supporting others to successfully sell products and directly benefit from
successful transactions. Affiliates usually profit from some kind of pay-per-sale or pay-
per-display compensation. The company, on the other hand, is able to gain access to a
more diverse potential customer base without additional active sales or marketing
efforts.

Examples:
What?

Value • Amazon Store (1995)

Proposition
• Pinterest (2010)
Who?

Revenue Value
Model Chain
Why? How?

47
Cash Machine
https://businessmodelnavigator.com/pattern?id=6

The customer pays upfront for the products sold to the customer before the company is
able to cover the associated expenses. This results in increased liquidity, which can be
used to amortize debt or to fund investments in other areas.

Examples:
Consumer protection What?
point of view:
Value • American Express (1891)
Proposition
Problematic if too many • Dell (1984)
consumers are not using Who? • PayPal (1998)
their prepaid services Revenue Value • Groupon (2008)
Model Chain
Why? How?

Dell: Computer manufacturer Dell was one of the pioneers in employing a build-to-order strategy in the 1980s.
Computers were first customized and paid for by the customers, with invoices for the computer parts from the
suppliers having lengthier payment deadlines. This allowed it to achieve a highly negative cash conversion cycle. 48
Digitalization
https://businessmodelnavigator.com/pattern?id=11

Relies on the ability to turn existing products or services into digital variants, and thus to
offer advantages over tangible products, e.g., easier and faster distribution. Ideally, the
digitization of a product or service is realized without negatively impacting the value
proposition which is offered to the customer: efficiency and multiplication by means of
digitization should not reduce the perceived customer value.

Examples:
What?
Note: • Spiegel Online (1994)
Value • SurveyMonkey (1998)
Proposition
Digitalization does not imply • Napster (1999)
that a company is working Who? • Wikipedia (2001)
on a digital version of its own Revenue Value
• Facebook (2004)
offline product; the offline Model Chain • Dropbox (2007)
Why? How?
version can also be offered • Netflix (2008)
by other companies
49
Hidden Revenue
https://businessmodelnavigator.com/pattern?id=21
The logic that the user is responsible for the income of the business is abandoned. The
main source of revenue comes from one or many third parties, which cross-finance
whatever free or low-priced offerings attract the users. A very common case of this model
is financing through advertisement, where attracted customers are of value to the
advertisers who fund the offering. This concept facilitates the idea of 'separation between
revenue and customer'.

What?
Examples:

Value
Proposition
• JCDecaux (1964)
• Sat.1 (1984)
Who? • Google (1998)
Revenue Value • Facebook (2004)
Model Chain
Why? How?

JCDecaux: Provided and maintained bus shelters, financed by advertising.

50
https://www.jcdecaux.com/blog/invention-new-business-model
Peer-to-Peer
https://businessmodelnavigator.com/pattern?id=37

This model is based on a cooperation that specializes in mediating between individuals

(belonging to a homogeneous group). The company offers a platform, i.e., an online
database and communication service, which connects these individuals. Services could
include offering personal objects for rent, or the sharing of information and experiences.

Examples:

Relevant for What? • eBay (1995), Craigslist (1996)

platform-based • Napster (1999)
Value
business models Proposition • Couchsurfing (2003),
• LinkedIn (2003), Skype (2003)
Who?
• Zopa (2005),
Revenue Value
Model Chain
• SlideShare (2006), Twitter (2006)
Why? How?
• Dropbox (2007), Airbnb (2008)
• TaskRabbit (2008)
51
Thought Exercise:
Business Model Innovation

How could you apply Pattern X

to a business that you are familiar with?

Business Model Navigator

https://businessmodelnavigator.com/explore

52
Role of IT in Business Model
Patterns
• IT can play a constitutive role, i.e. without it, the business model pattern
would be impossible or hard to realize at scale, e.g., in E‐Commerce, Long Tail
and Crowdsourcing. Without IT they would be unthinkable so they are identified
as digital business model patterns.

• IT can increase value, e.g., Self Service or Customer Loyalty existed long
before the Internet and as they were deployed transformed industries. But with
IT, and the Internet in particular, their significance has increased dramatically

• IT can be irrelevant for a business model pattern such as for Franchising and
Ingredient Branding.
53
Thought Exercise: Smart Homes,
Internet of Things and Business
Model Patterns

Digital business model patterns are becoming relevant to physical industries for the first time

Think about a physical product that you are familiar with. How could
Freemium or Leverage Customer Data be applied in that context?

Leverage Customer Data pattern: New value is created by collecting customer data and preparing it in
beneficial ways for internal usage or interested third-parties. Revenues are generated by either selling
this data directly to others or leveraging it for own purposes, i.e., to increase the effectiveness of advertising.
https://businessmodelnavigator.com/pattern?id=25 54
Value‐creation Layers in an
Internet of Things Application

Which business
models does a
smart LED light
bulb enable?

Fleisch et al. 2014: Business Models and the Internet of Things 55

https://www.alexandria.unisg.ch/236057/1/2090_EN_Bosch%20Lab%20White%20Paper%20GM%20im%20IOT%201_2.pdf
Value‐creation in an Internet of
Things Business Model
The value of an IoT solution is found in the combination of a classic product that
in the past was not linked to the Internet, but is now upgraded with IT (layers 2
through 4).

Note: Layers 2 – 5 may be closely related to the physical product, or not (e.g., sensors could
measure unrelated aspects of the environment)

At layer 5, value is experienced as benefits from the physical product and the
digital services associated with it.

This process results in a whole that is more than the sum of its parts.

56
Now Close to 200 Business Model
Patterns

Weking, J., Hein, A., Böhm, M., & Krcmar, H. (2020). A Hierarchical Taxonomy of
Business Model Patterns. Electronic Markets, Volume 30, pages 447–468.
https://d-nb.info/1176175696/34 57
Learning Objectives
1. You understand the benefits of models and know the
common elements of models.
2. You are able to create models and analyze business
models.
3. You understand the principles of business model
innovation and are able to draw connections to the
digital transformation.
4. You understand the concept of business model
patterns.
58