Sloan School of Management, MIT: Do Some Business Models Perform Better?

MIT Center for Coordination Science Working Paper No. 226

Despite its common use by academics and managers, the concept of business model remains seldom studied. 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. Using this framework, we classify the revenue streams of the top 1000 firms in the US economy in fiscal year 2000 and analyze their financial performance. 

The results show that business models are a better predictor of financial performance than industry classifications and that some business models do, indeed, perform better than others. Specifically, selling the right to use assets is more profitable and more highly valued by the market than selling ownership of assets. Unlike well-known concepts such as industry classification, therefore, this paper attempts to describe the deeper structure of what firms do and thereby generate novel insights for researchers, managers and investors.

(To read the article on http://ccs.mit.edu, please click here)