Towards Business and Information Systems Fit through a Business Model Ontology

Business and Information Systems (IS) alignment is a key management issue. Yet, little research shows managers how a fit between these "two worlds" can be achieved. The goal of this article is to provide a Business Model Ontology to formulate, understand, analyze and share a company's business model. On the one hand this shall help managers to express their vision and understanding of the business logic of a company. On the other hand it shall help IS staff to analyze the formally expressed business model and point out opportunities and risks from an IS point of view. The Business Model Ontology consists of four main pillars, which are Product Innovation, Customer Relationship, Infrastructure Management and Financial aspects that can be further decomposed into their elements. Towards Strategy and Information Systems Alignment through a Business Model Ontology 2 Alignment between business strategy and Information Systems (IS) has traditionally been a key issue in IS management (Brancheau et al. 1996). A recent study on 226 companies supports the hypothesis that alignment between business and IS strategies improves business performance (Sabherwal and Chan 2001). Yet, despite this general recognition of the importance of strategic IS alignment, insufficient research has been conducted on how such alignment is achieved and sustained over time (Hirschheim and Sabherwal 2001). In this paper we outline a Business Model Ontology, which aims at building a bridge to connect the "world of business" with the "world of processes and IS". The paper is structured as follows. The first section explains the role of the business model in aligning strategy and IS. The second section introduces the Business Model Ontology, while the sections 3 to 6 outline its elements. These elements are completed with management tools and illustrative examples derived from the ontology. The final section sketches implications and further research. 1 IS AND BUSINESS ALIGNMENT THROUGH BUSINESS MODELS Whereas the early work on strategic IS alignment focused on aligning IS strategy to business strategy, the strategic potential of IS later led to the recognition that IS strategy can also affect business strategy (Henderson and Venkatraman 1993; Hirschheim and Sabherwal 2001). In simpler terms, business people have to be able to clearly formulate their vision and what they expect from IS people and IS staff has to be able to point out how Information and Communication Technology (ICT) can improve a company's business goals (see figure 1). However, these two worlds, the one of business and the one of technology, sometimes seem quite distant. On the one hand every manager and entrepreneur has an intuitive understanding of how his business works, but in many cases she or he is rarely able to communicate it in a clear and simple way (Linder et al., 2001). On the other hand, IS people have a clear idea of what ICTs are able to accomplish in IS management, but they struggle to achieve a strategic fit with the big (business) picture. In this paper we outline a Business Model Ontology that shall help narrowing the gap between IS and business and achieve a better fit for the following reasons: 1. The process of modelling social systems or an ontology – such as a business model – helps identifying and understanding the relevant elements in a specific domain and the relationships between them (based on (Morecroft 1994; Ushold and King 1995)). Business models can also serve as a new unit of analysis (Stähler 2002). 2. The use of a formal approach to business models (e.g. our ontology) helps managers and IS staff to easily communicate and share their understanding of the business logic among each other (based on (Fensel 2001)). 3. Business models facilitate change because of their building-block-like approach to formulating the business logic of a company (Petrovic et al. 2001). Figure 1: Business Strategy and Information Systems Alignment 2 THE BUSINESS MODEL ONTOLOGY The Business Model Ontology is a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It makes it possible to easily capture, model, understand, share (Peterovic et al. 2001), observe over time, and, maybe even measure and simulate business models. In general, some authors see business models as a new unit of analysis and interesting tool for innovation (Stähler 2002). Our ontology can be broken down into four simple pillars, which are the "what", the "who", the "how" (Markides 1999) and the "how much" of a firm. In other words, these pillars allow to express what a company offers, who it targets with this, how this can be realised and how much can be earned by doing it. This decomposition also builds on the four perspectives of the Balanced Scorecard (Kaplan and Norton 1992), namely the learning & growth-, the customer-, the process-, and the financial perspective. In our model these pillars are translated into four main business model blocks that are then further decomposed: Firstly, the PRODCUT INNOVATION block, which describes the value proposition of a firm. Secondly, the CUSTOMER RELATIONSHIP block, which describes how a firm gets in touch with its customers and what kind of relationships it wants to establish with them. Thirdly, the INFRASTRUCTURE MANAGEMENT block that describes what activities, resources and partners are necessary to provide the first two blocks. And finally, the Business Business Model Information Systems Information Systems support the company's business model and are targeted on areas that are critical to successful business performance Managers are aware of the use of Information Systems to realize goals, exploit opportunities and obtain competitive advantage Towards Strategy and Information Systems Alignment through a Business Model Ontology 3 FINANCIAL ASPECTS block, which describes the revenue flows and the pricing mechanisms of a firm, or, in other words, how a company makes money through the other three blocks (see figure 2). Figure 2: Business Model Framework 3 PRODUCT INNOVATION & VALUE PROPOSITION PRODUCT INNOVATION covers all aspects of value that the firm offers its customers. This comprises not only the company's bundles of products and services but the manner in which it differentiates itself from its competitors. Product innovation is composed of the VALUE PROPOSITION element, which can be decomposed into its ELEMENTARY BENEFIT (see figure 2). In figure 3 we illustrate a tool derived from our ontology that maps the VALUE PROPOSITION of easyMoney.com, a credit card company founded by Haji-Ioannou who is better known for founding easyJet, the successful European no-frills airline. Its value proposition consists of customized credit cards at attractive prices. Through transparent pricing, clear product offerings, the use of ICT and avoiding cross-subsidies between products and customers the credit card client only pays for what he gets. The tool classifies the ELEMENTARY BENEFITs of easyMoney according to their stage in the value life cycle, in other words, at the moment of the value creation (e.g. customization), its appropriation (e.g. Amazon's one-click shopping), its consumption (e.g. listening to music), its renewal (e.g. software updates) or its transfer (e.g. disposal of old computers, selling of used books). For every stage of the value life cycle the tool assesses easyMoney's value level and price level for the aggregated ELEMENTARY BENEFITs, which makes them comparable to the one's of its competitors (i.e. traditional credit card companies). The value scale is qualitative and ranges from me-too value (e.g. commodities), over innovative imitation (e.g. Pocket PC vs. Palm) and excellence (e.g. Swiss watches) to innovation (e.g. Viagra in the 90's). The price scale is also qualitative and goes from free (e.g. online newspapers) over economy (e.g. Southwest, EasyJet, RyanAir) and market (e.g. stocks) to high-end (e.g. Rolex). Figure 3: easyMoney's Value Proposition Value creation Value appropriation Value consumption Value renewal Value transfer Card Builder allows customers to design their individualized credit card tailored to their needs Applications are made via the easyMoney.com Website The easyMoney credit card is accepted at over 19 million locations Credit card costs are low based and based on the customer's profile The credit card configuration can be changed up to 3 times a year for free An additional card holder can be added Value Proposition of easyMoney Clear offerings and transparent pricing help customers find the right product