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Occasional Working Paper — No. 5, July 2012

A multi-purpose hierarchical business model framework

Susan C. Lambert

University of South Australia

School of Commerce

Centre for Accounting, Governance and Sustainability

University of South Australia

City West Campus

GPO Box 2471

Adelaide, South Australia 5001

ISSN 1838-0409 (Print) 1838-0468 (online)

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Aims and Scope

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ISSN No: 1838-0409 (print) 1838-0468 (online)

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Citation

The following Occasional Working Paper should be cited as:

Lambert, S.C. (2012), A multi-purpose hierarchical business model framework, Centre for Accounting,

Governance and Sustainability Occasional Working Papers, No. 5, July, University of South Australia,

Adelaide.

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A multi-purpose hierarchical business model framework

Susan C. Lambert

Abstract

The aim of this paper is to explain the benefits of a hierarchically structured

business model framework and then to propose such a framework. Existing

literature is used to justify the need for a hierarchically structured business

model framework. The hierarchical business model framework developed has

been modelled using object-oriented modelling principles that have been used

for information systems modelling for several decades. A brief overview of the

object-oriented modelling principles is provided prior to it being used to build

the hierarchical business model framework. The resultant framework is able to

accommodate a variety of perspectives at a highly abstract level and then be

unpacked to provide the level of granularity or detail required by the user.

The robustness of the modelling paradigm that is chosen for this task provides a

structure by which business model data can be collected and organised in a way

that provides the model with integrity whilst allowing the business model to be

depicted in a variety of ways. Not only is the hierarchical business model

framework sufficiently versatile to meet the needs of multiple users but because

it incorporates the qualities of an inclusive hierarchy it is suitable as a basis for a

general classification of business models.

The hierarchical business model framework is described in a broad sense in this

paper leaving the detailed engineering of the model for future research.

Keywords: business model, hierarchical model, object-oriented modelling

.

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A multi-purpose hierarchical business model framework

1. The need for a multi-purpose, hierarchically-structured business

model framework

Business models have the potential to serve many purposes. Based on a review of the

literature, Al-Debei and Avison (2010) identify three over-riding functions of business

models being, a conceptual tool for aligning business processes to business strategy, a

device for recognising the economic and strategic benefits of technological innovations and

artefacts and, thirdly, a means by which the logic of the enterprise can be captured and

articulated to generate knowledge capital. In addition to these three practice oriented

functions of the business model Mäkinen and Seppänen (2007, p. 739) acknowledge that

‘models are fundamentally classification systems’ and that existing business model

frameworks do not serve this purpose well. It is further argued that hierarchical structuring

and a more detailed level of analysis of elements is required to enable business models to be

described and subsequently classified (Mäkinen and Seppänen 2007). Hierarchical

structuring will permit generalisations to be made at different levels of analysis (Mäkinen

and Seppänen 2007).

There exists a multitude of business model frameworks that provide abstract visual

representations of the business model and low level narrative descriptions of the business

model however these low level descriptions lack structure and therefore have limited

usefulness. In this paper a hierarchical business model framework (HBMF) is proposed as a

suitable structure upon which business model data can be collected and communicated for

multiple purposes including the creation of a general classification of business models that

will enable generalisations to be made, hypotheses to be constructed and theory developed

(Mäkinen and Seppänen 2007). In order to guide the development of the business model

framework that can serve the identified functions of the business model, the business model

reference model proposed by Lambert (2012) is used. This reference model prescribes the

basic business model elements and recognises that the unit of analysis, level of analysis and

conceptual focus of the business model dictate its form. The basic business model elements

proposed by Lambert (2012) comprise the top, most abstract level of analysis that

encapsulates classes and sub-classes of more specific and detailed business model elements.

This paper proceeds as follows, an overview of the object-oriented modelling paradigm is

provided along with reasons for its suitability in building the HBMF. The HBMF is then

constructed.

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1.1 Selection of the modelling paradigm

Just as it is necessary to decide on the materials and method with which to construct a

physical model, before building a conceptual model, such as a business model framework, it

is necessary to determine the unit of modularity and the rules with which the model will be

built. This is known as a paradigm. A paradigm is a way of thinking about a problem that

determines how to organise, and approach learning about and understanding that problem

(Brown 2002).

The modelling paradigm used for the HBMF is the object-oriented paradigm. The

object-oriented paradigm mimics the way humans structure knowledge, conceptualise, and

communicate complex problems making it useful for model building (Jacobson, Ericsson

and Jacobson 1994, p. 72). Evidence of the suitability of objects for producing useful

models can be found throughout the psychology literature (Smith and Medin 1981;

Atkinson et al. 1987; Solso 1988). An object is equivalent to a proposition which is the

smallest unit of knowledge and forms the building blocks of cognitive models that assist in

understanding complex problems (Solso 1988). The Gestalt psychologists maintain that

humans perceive the whole form rather than its parts; that they perceive the whole object

rather than individual characteristics.

A good argument for using object-orientation to model businesses is that it models the

business in a way that is very close to the real thing. There is a minor semantic gap between

reality and the model. Object-oriented models are therefore natural and easy to understand

(Jacobson, Ericsson and Jacobson 1994, p. 47). In the section that follows the principles of

the object-oriented modelling are described.

2. Object-oriented modelling principles

The five fundamental concepts of object-oriented modelling are objects, encapsulation,

classes, inheritance and associations. Together these concepts permit problems to be

abstracted in ways that help in dealing with complexity. ‘Abstraction is essential to the

functioning of a normal human mind, and is an immensely powerful tool for dealing with

complexity’ (Wirfs-Brock, Wilkerson and Wiener 1990, p. 3). This ability to abstract from

the detail assists in understanding and communicating complexity.

2.1 Objects

The unit of modularity under the object-oriented modelling is the object. The starting point

for object-oriented modelling is to identify the real-world objects that make up the problem

domain (Brown 2002). Each element of the business model is an object. Business model

objects include entities like ‘customers’ and ‘suppliers’ (often referred to as actors); things,

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such as ‘products’ and ‘resources’, events such as ‘place an order’ or ‘make a delivery’ and

abstractions such as ‘strategy’ and ‘organisation structure’.

2.2 Encapsulation

Objects encapsulate their own attributes, behaviours and relationships with other objects.

‘The object-oriented approach attempts to manage complexity inherent in real-world

problems by abstracting out knowledge, and encapsulating it within objects’ (Wirfs-Brock,

Wilkerson and Wiener 1990, p. 5). The object is like a sealed component. Unless the cover

of the component is removed, the details about how the component operates cannot be

known. If the cover is removed, other sub-components, each one encapsulating its own

complexity, are revealed. It might not be necessary to know any more about those

sub-components, but if required, the covers of those sub-components can be removed to

reveal their complexity. The user can view the complexity of the object or view the object

in an abstract sense, seeing that it exists and, in broad terms, knowing what it does. If

necessary, the user can peel away the ‘cover’ of the object and learn more about it.

Apportioning complexity to individual objects is an effective way of managing complexity.

Encapsulation is not only useful in understanding complex systems; it is useful in designing

and organising complex systems. Because each object encapsulates its own data, processes

and associations, the resulting model is robust; each object is protected from all that

happens to other objects in the system. Nothing outside the object can change its attributes,

behaviour or associations with other objects. Once the object is created it is protected from

the rest of the system. Changes to that object cannot take place from outside the object.

Using the component metaphor, the component cannot be changed by any other component

in the system.

Encapsulation and information hiding enable a multitude of views to be displayed while

maintaining consistency between views. Information reliability is achieved because the

abstraction layers draw information from the object itself. Information relevance is ensured

by displaying only the level of detail the user requires, leaving the model uncluttered and

understandable. Encapsulating data, behaviour and associations within objects deals with

one aspect of complexity. This ability to hide information within objects facilitates

abstraction and provides a logical means of organising information that promotes

information integrity (Wirfs-Brock, Wilkerson and Wiener 1990).

2.3 Classes and inheritance

Objects are organised in hierarchical classes and inherit characteristics of the classes of

objects above them, thus providing efficient and effective means of defining objects that

share characteristics but are not identical. Organising objects into classes of similar objects

and recognising their similarities is a commonly used proven technique for handling large

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amounts of complex information. For example we do not refer to each plant in the garden as

a unique object; rather we refer to plants as trees or shrubs, both of which are classes of

plant. It is not necessary to describe every aspect of the plant because the class to which it

belongs provides that information and we are left to explain only the characteristics that

distinguish that particular tree or shrub from others in the class.

The common aspects of objects within a class are assumed rather than explicitly recognised

(Smith and Medin 1981). Objects within a class are said to inherit the properties of the class

above it. This technique is used extensively in day-to-day life, people mostly not even

realising that they do it.

Classes provide a structure of templates for defining other objects (Wirfs-Brock, Wilkerson

and Wiener 1990). There exists a level of core behaviour common to all objects within a

class which distinguishes one class from another and is the basis for grouping like objects

within a class. Lower level classes of objects inherit the properties of higher level classes of

objects and have additional properties that distinguish them from each other.

2.4 Associations

Associations refer to the ways in which objects relate to each other. Each object specifies

the other objects with which it has an association and the nature of that association, for

example, a customer object will have at least two associations with a product object,

‘purchase’ and ‘pay for’. The customer purchases a product and pays for the product. An

important feature that contributes to the robustness and integrity of the object-oriented

model is that associations between objects do not affect the attributes and behaviours

encapsulated within the objects. Changes can be made to the associations and the objects

themselves remain unchanged.

3. Object-oriented modelling principles applied to the business model

So far object-oriented modelling has been described in relation to the modelling of

information systems and computer programs however it is also used by business consultants

to gain an understanding of a business prior to reengineering business processes (Brown

2002) and it is ‘a powerful tool for communication among [system] developers,

management and users’ (Brown 2002, p. 87). The starting point for object-oriented

modelling is to identify the real-world objects that make up the problem domain. The

information about the object can be hidden (encapsulated) thus providing an abstract view.

Some, or all, of the information can be revealed to provide a detailed view of the object.

Encapsulation and information hiding enable a multitude of views to be displayed while

maintaining consistency between them. The basic business model objects are the real-world

objects of the business. The ability to hide information within objects facilitates abstraction

and provides a logical means of organising information that promotes information integrity

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(Wirfs-Brock, Wilkerson and Wiener 1990). object-oriented modelling organises the

objects of the problem domain into hierarchical classes and encapsulates information within

the objects. Information relevance is ensured by displaying only the level of detail the user

requires, leaving the model uncluttered and understandable.

Although the business model may be viewed at different levels of abstraction or from

different conceptual foci, the same objects are being viewed and their relationships with

other objects in the business do not change. The HBMF developed in the next section is

based on object-oriented modelling principles allowing the business model to be observed at

any level of analysis and for any unit of analysis. The broadest unit of analysis is the whole

value domain in which the enterprise is an actor. The second level of analysis displays more

detail about the business model objects. A multitude of lower levels exist that consist of the

individual objects that make up the more complex objects1. Associations, combined with

encapsulation and class hierarchies permit the multi-level, multi-perspective views of the

business model to be achieved without compromising the integrity of the information

presented in each view.

4. The hierarchical business model framework

In constructing the HBMF the reference model proposed in Lambert (2012) is utilised.

According to the reference model six basic business model elements, referred to hereinafter

as the basic business model objects, exist. The six basic business model objects are derived

by firstly establishing the object that holds primacy and then establishing the remaining

objects that flow from that prime object. According to the reference model (Lambert 2012)

the business model object that holds primacy is the value proposition. All remaining objects

are derived from their relationship with the value proposition. Three additional dimensions

make up the reference model, the unit of analysis, the level of analysis and the conceptual

focus. Figure 1 provides a visual overview of the four dimensions of the reference model.

The scope of the business model concept is defined by the unit of analysis. Depending on

the purpose of the model the unit of analysis might be restricted to the enterprise under

review or a part of the enterprise such as a business unit. Alternatively the unit of analysis

scope might be broad and include external entities such as suppliers, regulatory bodies and

outsourcing partners that make up the value network. The level of analysis determines how

abstract or granular the business model depiction is. A highly abstract depiction of the

business model concept is more versatile and generalisable than one which is detailed and

granular. A detailed depiction, on the other hand, provides more information that

1 In explaining the HBMF the term object and class of object will be used interchangeably. Strict

interpretations use the term object to refer to an instance and class to refer to a class of object (Brown, 2002).

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distinguishes one business model concept from another. A hierarchically structured business

model framework such as the one proposed in this paper provides the means by which

detailed information can be displayed or hidden depending on the required level of analysis.

Figure 1: Reference Model Overview

The final dimension of a business model framework is the conceptual focus. The conceptual

focus describes the lens through which the researcher views the business and determines the

way the business model objects are modelled. The researcher might take a resource based

view, an activity based view or a combination of both. For example, the view might focus

on monetary characteristics of the business model objects, social or environmental factors.

Each of the reference model dimensions influences the type of information that is captured

and communicated by the business model.

5. The hierarchical business model framework

Providing a useful structure for viewing the business model and an effective and efficient

way of recording and organising business model data are the ultimate objectives of the

HBMF. The multi-level and multi-perspective qualities of the framework will now be

explained and then illustrated using a simple business example of an Australian medical

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practice. It will become evident that the HBMF is useful for management to understand,

analyse and manage existing business models and to evaluate prospective business models.

It can also serve information systems developers to specify and design new information

systems and is suitable as a basis for classifying business models. The notation used to refer

to an object or class of objects is: Object Name. For example, the ‘Value Proposition’ class

of objects will be shown as Value Proposition.

An overview of the HBMF is achieved by presenting it at the most abstract level which is

referred to here as level 1. Figure 2 shows the level 1 set of basic business model objects

that make up a specific value domain rearranged to reflect the associations between all of

the objects. In this hypothetical example the Value Proposition is offered through a Channel

to the Customer. The Customer provides the Value In Return to the enterprise and the Other

Entity provides input to the Value Adding Process. These associations are not the same for

all businesses. For instance, the Other Entity might be an internet service provider that aids

in supplying the Channel to the enterprise.

Figure 2: Level One - Basic Business Model

The advantage of this high level of analysis lies in its breadth of coverage; its drawback lies

in its lack of detail (Singer 1961). How abstract or how detailed the depiction is depends on

the needs of the user. For some purposes it may be enough to name the other entities, to

provide a short description of the exchanges including the value that is exchanged and the

communication channels that permit the transactions to take place. At this abstract level all

that is communicated is the broad description of the classes of objects.

At level 1, in its most abstract form, the business model depicts only the classes of objects,

their descriptions and their associations. Figure 3 shows the content of the Value

Proposition class of objects. A short description of the object is provided along with the

attributes of the object and the objects with which it has associations.

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Figure 3: The Value Proposition Object

The second level of analysis provides detail about the objects that make up the basic

objects. To illustrate this level, the unit of analysis is restricted to the internal aspects of the

business model. Figure 4 depicts level 2 of the business model displaying the Value

Proposition, the objects that make up the Value Proposition, i.e. Products, Services,

Information, the Value Adding Process and the Channel through which the Value

Proposition is offered to the Customer.

Figure 4: HBMF Level 2 – Internal Aspects of the Enterprise

The Value Proposition consists of (is a set of), a single Product, Service, unit of Information

or a combination of multiple Products, Services and Information. Figure 5 shows the

relationships between a Value Proposition and its elements.

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Figure 5: HBMF – Value Proposition and its elements

To find out more about the creation of the Product, we need to identify the value adding

processes required to create the Product. Figure 6 shows the Value Adding Process,

Activities, Resources and Capabilities required to create the Product. At the most abstract

level the user does not need to know anything about the Activities, Resources and

Capabilities but because each object encapsulates its own detail, it can be accessed and

viewed when required. For example, to discover the instances of Resources required

creating a particular instance of Product, this aspect of the business model can be isolated

and displayed as shown in Figure 6.

Figure 6: HBMF Level 3 and Below- Value Adding Process, Decomposed into Activity,

Resources and Capabilities

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Figure 6 shows the Resources and Capabilities required for the Activity, that contributes to

the Value Adding Process, used to create the Product object, that is part of the Value

Proposition. This hierarchical tree continues downwards until the individual, simple

Resource objects are identified. Resources and Capabilities are associated with one or more

Activities. The Activity can be further decomposed into the Tasks that make up the Activity

thereby providing more information (this is not shown in Figure 6). The level of

decomposition will depend on user requirements. Human Resources, Raw Materials, ICT

Resources and Equipment are kinds of Resources. Capabilities are associated with Human

Resources. The Value Adding Process creates a Product that, along with Service and

Information is part of a Value Proposition.

The ability to view the value domain as a whole or to look at any aspect of the business at

any level of abstraction, whilst maintaining the context, is a distinctive characteristic of the

HBMF. If the business model user is interested in the value exchanges rather than the

internal structure of the business (a different unit of analysis), the objects involved in the

value exchanges, including the Customer, Channel and the Value In Return can be

interrogated by displaying the complexity encapsulated within those objects.

6. An application of the HBMF: Australian primary health care medical

practices

This mini-case serves to illustrate the structure of the HBMF and the significance of

encapsulation and information hiding in managing the complexity of business models.

The majority of Australian medical practices are small businesses that operate within the

Primary Health Care Sector and consist of general practitioners (GPs) who are partners in

the medical practice (Carne, Howard et al. 2012). The value domain level business model

for a typical medical practice is shown in Figure 7. Each of the Other Entity objects in the

business model encapsulates its own attributes and associations. At the most abstract level

the business model can be described in the following way.

The Medical Practice provides primary health care consultations (Value Proposition) to

patients within a geographical proximity to the practice (Customer). The medical practice

receives a fee-for-service (Value In Return), determined and paid for by a federal

government body called the Department of Health (this is an ally to the enterprise), plus a

practitioner-determined fee (gap) from the patient (Customer).

The medical practice has four categories of Other Entity with which it interacts. The Other

Entities are:

The medical practitioners who are the Partners of the Medical Practice.

Suppliers of medical equipment and consumables to the Medical Practice.

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Other Health Service Providers that provide services directly to patients of the

Medical Practice either with or without the knowledge of the Medical Practice.

The Department of Health that is the policy implementing body of the Federal

Government, that controls the revenue model of GPs and pays part of the fee charged

to the patient.

Figure 7 shows Partners and Suppliers providing inputs to the Value Adding Processes that

create the Value Proposition called Standard Medical Care. The Standard Medical Care is

offered to Patients via a Face-to-Face Channel. Patients also receive services from Other

Health Service Providers. The Department of Health provide a portion of the Value In Return

to the medical practice and the Patient provides the remainder. The Department of Health

regulates that the Value In Return for Standard Medical Services is a predetermined Fee For

Service.

Figure 7: Level 1 – Medical Practice Basic Business Model

Figure 7 illustrates the basic business model objects of the medical practice and its position

in the primary health care value domain. A brief narrative provides an overview of the

actors and their relationships with each other. This level 1 depiction of the medical practice

is sufficient to provide an overview of the business concept including the significant objects

and associations between objects. If more information is required, the model can be

expanded to focus on the aspects of the medical practice that are of interest.

In Figure 8 the Value Adding Process shows two activities, Take Appointment and Consult

Patient which are decomposed into their respective Resources and Capabilities.

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Figure 8: Four Levels of the Value Adding Process Objects – Activities, Resources and

Capabilities

By arranging objects into class hierarchies and by following the principle of encapsulation,

the model can be scrutinised from any aspect and at any level of abstraction.

The Australian medical practice business model can be used to identify the resources

currently employed in the practice. It can be adjusted to reflect potential strategic changes in

the practice such as incorporating new value propositions such as chronic disease self

management programs. The implications of strategic changes in terms of activities, physical

resources, capabilities, other entities required to implement new programs and changes to

the customer base can all be mapped and analysed at varying levels of analysis. The

characteristics of each object that are captured and displayed will depend on the conceptual

focus of the user. The conceptual focus might be monetary implications, regulatory

compliance implications or equity factors to mention a few.

7. Significance of the HBMF for practice and future business model

research

The HBMF is founded on the basic business model objects specified in the business model

reference model proposed by Lambert (2012) that encompass all units of analysis and

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therefore can accommodate a multitude of conceptualisations. The HBMF provides a visual

representation of the business that can be abstracted or detailed to suit individual user needs.

The conceptual focus applied to the business model determines what object characteristics

will be gathered and reported. The user might be interested in the traditional economic

characteristics of the business model objects, or the user might want to interrogate the

business model for environmentally or socially sustainable characteristics. The user might

wish to focus on particular objects such as activities or resources. All of these views of the

business can be incorporated into the proposed HBMF because it allows multiple levels of

analysis. Adherence to the principle of encapsulation and information hiding allows a range

of data to be contained within the objects but only relevant data revealed. The HBMF, based

on the object-oriented modelling principles can handle multiple units of analysis at multiple

levels of analysis and it can accommodate multiple conceptual foci. object-oriented

modelling principles that have been tried and tested extensively in the computer science

discipline and have long been recognised by psychologists as a mechanism that humans use

to handle complex reality, enables a versatile, yet robust, model to be built.

The hierarchical structure of object classes permits the business model to be depicted at the

most abstract and at the most granular level of analysis. The HBMF has the capacity to cater

for a multitude of conceptual foci by specifying the attributes of the business model objects

about which data can be collected.

Another significant feature of the HBMF is that it captures the nature of relationships

between business model objects, again, at multiple levels of detail and is therefore a causal

model rather than simply a descriptive model (Mäkinen and Seppänen 2007). Classifying

business models is crucial to future research (Mäkinen and Seppänen 2007). The business

model conceptualisations currently present in the academic literature are varied and no

single, dominant conceptualisation has emerged that has the potential to form the basis of a

general classification of business models (Mäkinen and Seppänen 2007). The

object-oriented HBMF is proffered to fill that void.

8. Conclusion and Limitations

The object-oriented modelling principles coupled with the business model reference model

have been used to create the HBMF that provides the structure for a multi-purpose business

modelling tool.

The HBMF is yet to be applied to diverse businesses in terms of the size of the business and

the complexity of the business concepts. The ability of the HBMF to deal with diverse

conceptual foci is another area that needs to be explored. Most business model applications

focus on value exchanges or activities with monetary profitability being the prime interest.

The potential for business models that have been constructed using the HBMF to also

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capture and communicate environmental and social sustainability factors is an area of

research that deserves some attention. Substantial benefits may be derived from using the

one model of the business for multiple reporting imperatives.

The HBMF requires refinement and detailed engineering. The application of a modelling

tool such as the Unified Modelling Language (UML) to construct templates for the

meta-business-model and to further validate the HBMF holds potential for future research.

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