Beyond the Big Idea - Business Model Design and the Performance Predictors in Entrepreneurial Firms

When we look at entrepreneurial companies we often focus on the obvious: what they do or sell. “What a great idea”, we say about the people who thought up eBay, “Why didn’t I think of that”?, we lament, while watching scooters fly off the shelves. But coming up with a bright idea is just part of the picture, say Professors Christoph Zott and Raphael Amit. In this recent working paper the authors address, through theoretical and empirical research, one of the key factors affecting entrepreneurs’ ability to create wealth: the design of their business model. They find that there is a positive association between business model design and firm performance and that the prevailing business climate has a strong influence on the appropriateness of each model.

by Christoph Zott

While previous research on entrepreneurship focused on the importance of action or what is done, Christoph Zott, Associate Professor of Entrepreneurship at INSEAD and Raphael Amit from The Wharton School of the University of Pennsylvania, step back and look at design-related tasks, asking, “How does the business model affect performance”? In other words, what link is there between performance and how the company is designed to interact with and relate to suppliers, customers, and partners?

Their research shows that certain business models, namely efficiency-centered and novelty-centered models, positively affect financial performance. In addition, they discovered that the economic environment plays an important role in determining which model has the most impact on performance. During economic downturns, for example, an efficiency-centered design is perceived as more valuable, while during economic booms, a novelty-centered model has greater performance impact. Finally, they find that while many businesses encompass aspects of both models (for example, eBay is both novelty- and efficiency-centered) a business model that tries to be both may have pitfalls.

The duo’s empirical research was gleaned from studying 190 young, growth-oriented firms in the US and Europe that had gone public between 1996 and 2000. They measured various business model design themes as variables, which they then regressed on a range of performance measures. These performance measures included the market value of the firm’s equity at different points in time. Specifically, the authors contrasted the performance of entrepreneurial firms in the boom year 1999 with that in the bust year 2000, which represented tougher environmental conditions (e.g., in terms of fundraising) for entrepreneurial firms. They found that the positive association between the performance of firms and efficiency-centered business model design is stronger in economically tough times than in good times. The reverse holds true for novelty-centered designs: innovative business models drive performance more strongly in good than in bad times. However, while including novel and efficient design elements in a business model clearly has benefits, doing both at the same time may also entail costs in the form of diseconomies of scope.

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