Home Computer Science
VALUE COMPOSITION FOR BUSINESS MODELS OF HIGH-GROWTH ENTERPRISES
In the literature, the number of studies on high-growth enterprises (HGEs) is increasing. HGEs affect the development of the economy not only through their own development, but also through the creation of new jobs and an innovative approach to doing business. HGEs operate in all sectors and incorporate all company sizes, however, the most of them can be observed among small and young enterprises (Daunfeldt et ah, 2016; Demir et ah, 2017). However, most of the problems arise when determining what criteria are adequate to name an enterprise an HGEs. Currently, it is widely accepted that HGEs are characterized by an increase in revenues from sales or the employment of more than 20% on average annually over the consecutive three years (OECD, 2010). Microeconomic studies on HGEs focus on the potential to create jobs (Coad et al., 2014), processes, forecasts, and conditions that make companies’ development easier or harder (McKelvie and Wiklund, 2010).
From the economic development point of view, HGEs are important, because they create jobs and belong to the group of innovative enterprises; in addition, they quickly react to changes in the market and adapt to its requirements. This quick response to changes is reflected in HGEs’ business models (BMs). This is particularly important in the current economic situation, where changes in the labor market tendencies are observed, caused by the displacement of the employer market by the employee market. Any well-operating enterprise bases its activity not only on developed long-time strategy but most of all on the BMs. The ability to create BMs is an important issue for entrepreneurs. The way they create their BM is determined, for example, by the income level or competitive position on the market. HGEs should be a reference point for other entities, as their BMs are characterized by the employment increase and/or sales revenues increase. It is worth to take a closer look at how HGEs build their BMs.
Elements of the Business Model Construction
The issue of constructing BMs is already quite widespread in theoretical and practical researches. The functioning of the enterprise must be based on a specific action logic. In any economic entity, it is necessary to determine the ways that reflect the concept of its activity and at the same time illustrate the methods of achieving the assumed goals. Creating an original business idea obliges to undertake further projects determining the scheme of further functioning of the enterprise. The enterprise’s activity must be carried out according to specific assumptions. Creating a tool that schematically illustrates the idea of business and reflects the business plan is linked to building a BM. Bearing in mind that the model is a simplified picture of reality, it can be pointed out that the BM is a simplified picture of the business reality, and thus a pattern of business activities.
The idea of the BM is to determine the path of an enterprise development as well as operational level activities that would make this activity profitable and ensure the increase in the enterprise value. The environment, where the modern enterprises operate, is characterized with strong dynamics and complexity, thus requires the enterprise management to accept and understand the changes and be flexible in their activities. Even if the existing BM provides assumed benefits, it should be remembered that changes in the environment may support new opportunities and challenges (Chesbrough, 2006, p.81). Subsequently, this requires constant verification and adaptation of existing BM to changes in the market environment (Otola and Grabowska, 2018).
There is no single universal BM for all enterprises. Each type of business activity requires an individual approach to answering the key questions: What do we want to do, who is our customer, how do we want to provide our services/products, how do we make profit. Operating conditions for business entities impose the need to introduce innovation into various areas and spheres of enterprise activity. However, the design of future BM as well as the improvement of an existing one that adapts it to ever-changing environment, both require a set of conceptual tools (Zott and Amit, 2010). A well-constructed BM is based on many different components. The subject literature presents many methods for the BM construction, and each of them is based on components considered crucial by the idea creator. The most popular conceptual tool for developing an individual BM is the Business Model Canvas (BMC) created by Osterwalder et al. (2005), whose nine basic blocks can be classified into three general categories: revenue/product aspects, business actor and network aspects, and marketing-specific aspects. Table 3.1 presents the BM elements that are the most popular in the literature.
Research on BMs so far has been related either to conceptual approaches to the model itself (Afuah and Tucci, 2000; Amit and Zott, 2001; Morris et al., 2005; Osterwalder et al., 2005; Richardson, 2008; Teece, 2010) or empirical (mostly case study) indications of these models (e.g., Chesbrough, 2006; Landau et al., 2016; Solaimani et al., 2018; Spieth and Schneider, 2016). Despite the fact that BM conceptual approaches differ, primarily in the number of components, it is worth mentioning that many of them have common elements. However, the attention should be paid not only to BM components, but most of all to relations between them. It is impossible to create a successful BM, where each component is designed properly, but there is no synergy effect between the components. Some of the
Table 3.1 Business Model Elements
few publications in the subject literature that identify the relations between individual BM components are the BMC by Osterwalder et al. (2005) and the evolutionary BM proposed by Tikkanen et al. (2005). BMC is a template that does not impose any particular starting point for the analysis of a given undertaking. Its ultimate purpose is to provide the user with a clear understanding of the organization uniqueness and the way in which it satisfies the needs of target customers by focusing on possible relations among its nine components (Nielsen and Roslender, 2015). In the case of the model proposed by Tikkanen et al. (2005), there is an interaction between tangible BM elements (strategy and structure, network, operations, finance, and accounting) and managerial cognition (structures or the belief system of a company). According to the authors, first, significant relations should appear between tangible elements, as the lack of convergence between them might lead to the failure of developed BM. Second, relations between tangible elements and managers responsible for individual components are important. This approach indicates that BM is a cognitive mechanism. It is also worth mentioning the BM proposed by J. Richardson (2008), which does not directly indicate relations between BM components, but its assumed ultimate result, that is, value capture, which then translates into an enterprise competitive position. The author believes that a well-designed BM creates a holistic view of the enterprise activities in order to implement the strategy. It supports the management in determining a logically coherent structure of activities to create and deliver value added. Therefore, the main BM components are based on values:
Tie model outlined with the above elements (value proposition, value creation and delivery system, and value capture) is an instrument of value composition.
Value composition is present in all second-order BM elements described in its framework and including among others unique structure of activities and resources, and innovative value proposition for customers, as well as a scheme of capturing and allocating economic value (Teece, 2010; Tallman et al., 2018).
The first element, that is value proposition, primarily focuses on the customer and satisfying his potential needs. It is a set of benefits offered to customers. It is characterized by multidimensionality, manifested in various aspects of offered benefits in terms of quality, reliability, availability, throughput, or status (Biloshapka and Osiyevskyy, 2018; Sheehan and Bruni-Bossio, 2015). The priority determinant of value proposition is a precise identification of the target group, which the enterprise offer is directed to, including the indication of key customers. From the target group’s point of view, it is justified and significant for the company to present a unique product/service to a potential recipient. Such an offer distinguishes a given company on the market among its competition. The importance of the isolating mechanism that blocks and prevents competitors from instant imitating is crucial (Teece, 2010). Tie value proposition also indicates relations of the company with its partners, understood as customers and suppliers, as well as factors that are important elements of these relations.
The second element is value creation and delivery system, which includes the most partial components, that is, resources and capabilities, key activities, value chain, and business processes. According to Tallman (2014), value creation equals the process that allocates resources and capabilities of the enterprise to the needs and expectations demanded by the customers in such a way that is better than the other possible ways. Also, the same author understands value delivery as a logistic process connecting the company’s organizational structure with the structure of markets in which that company operates. Tie definition of the enterprise key resources and capabilities should focus on determining which assets are indispensable to maintain the business process. On the other hand, key activities highlight the most important activities contributing to the proper and efficient operation of the business process. However, a significant element that affects the value creation and delivery system is the value chain. Information, sale, and distribution channels should be designed and arranged in a way that supports an effective and efficient value delivery to customers.
The last element of BM is value capture, which aims at outlining future incomes that ensure profit margin in relation to planned costs (Richardson, 2008). The process of value capture enables the company to get a part of the value that was created for customers in the form of economic rents, excess profits, or cash flows (Tallman et ah, 2018). Value capture determines all types of revenues that can be generated by the model as well as costs that are incurred in the entire business process. A special attention should be paid to financial expenditures in relation to key resources, key activities, and the cooperation with partners. An important aspect is also an accurate estimation of fixed and variable costs with the allowance for possible areas of their future reduction, as well as the indication of possible extra cost areas that may emerge due to the activities planned. In addition, it is crucial to determine for which services/products a customer is willing to pay, and which should be delivered without charging the customer. When assessing value capture for the enterprise from suppliers and customers, some comparisons with other suppliers and customers should also be made (Bowman and Ambrosini, 2000).
It is worth noticing that the value composition based on value proposition, value creation and delivery system, and value capture does not consist only in the internal value generation, but also in negotiating value propositions with customers, partners, and suppliers that come with different requirements, ever changing under various factors (Tallman, 2014). The above-presented considerations on BM elements require a remark stating that each of these elements plays a crucial role in the process of enterprise value composition, but not each of them participates in the process in the same degree (Zhang et al., 2016). Summing up, there are elements dominating in the BM that are of key importance for the value composition process.