Excursion 12

Transaction-based business models

The most rigorous academic research published on business models has focused on the transactive perspective. In their 2001 article, “Value Creation in e-Business,” Professors Christoph Zott and Raphael Amit proposed that a business model “depicts the design of transaction content, structure, and governance so as to create value through the exploitation of business opportunities.” The article was published in Strategic Management Journal, one of the highest-impact peer-reviewed management journals in the world. It was the first research article focused on business models published in any of the top management journals. As of Summer 2016, it has roughly 4500 Google Scholar citations, placing it in the top 1% of all peer-reviewed papers across all disciplines.

Zott and Amit are, at essence, stating that a business model is the design of an organization’s interactions. In hindsight, it seems likely that this grew from observations that the early web-based companies, especially the ones with outlier valuations, were leveraging the internet to make transactions easier, cheaper, or different. Priceline inverted the travel sales model into an auction. Pets.com moved the sales and distribution transactions from in-person retail and pick-up to online interactions and delivery. Napster and mp3.com virtualized every step of the music acquisition process.

Taken bit by bit, it is a wonderfully efficient explanation. The content of a transaction is the stuff the transaction affects. What changes hands, whether physically or virtually, including tangible assets like good and money, or intangible assets like goodwill. The structure of a transaction is the set of relationships involved. Who are the parties? How are they connected? The governance of a transaction is the set of rules, requirements, contingencies, and rewards or punishments that make the transaction work. When does it happen? Can it be canceled or changed? What do the parties do if there is a problem?

This is a challenging, but powerful way to think about business models. If you carefully think through these and other questions about business models, you may recognize that the transactional system, used properly, can incorporate all other business model frameworks. We could generate Brilliant Business Models with the transactional system alone. For better or worse, however, neither academics nor practitioners adopted the transactional definition.

The tragedy of the transactional business model definition is that it was not adopted by either academics or practitioners. There are at least three reasons this happened. First, despite being arguably the most rigorous research conducted on how business models generate value, Zott and Amit’s dataset reflected IPO data during the height of the dot-com boom. In other words, their results were almost certainly determined by the “irrational exuberance” (6.2) of the market, not the validity of the business model measures. Second, the definition is non-intuitive, and difficult for practitioners to work with. Transaction “content, structure, and governance” seemed too complex. Finally, the challenge of measuring “transactions” left academics and practitioners convinced that more depth was required to explain business models. What about value creation? What about key resources? What about organizational activities?

We have studied business models as academics and entrepreneurs for 10 years. Adam’s PhD studies attempted to reconceptualize a more user-friendly business model definition. Adam is (understandably) partial to the definition that we developed. It is the definition used in The Business Model Book because it is more practice-friendly. At the same time, we concluded years ago that the transactional definition would have provided the most fertile ground for rigorous academic research.

A decade later, Amit and Zott adjusted their business model definition to focus on “activities". This appears to reflect that the dominant approach to business models has converged on the various Canvases that address resources, transactions, and value.