Formulation of Proxy Measures: Measuring Business Model for Improving Competitiveness

Abstract

This paper attempts to develop proxy measures for the business model dimensions (BMDs). In the empirical studies, the primary data with the survey method are not feasible, in some cases. Because either the data required are from distance past or measuring the construct without respondents’ biases is not feasible. The process started with indicators for each business model dimensions and logically linked these indicators with the tactical decision, strategic imperatives and finally to the elements from financial statements. These linkages were developed with the help of four experts and the validity of the same was tested with more experts. Additionally, the validity of the proxy measures was assessed using correlation analysis and paired sample t test. All the validation tests confirmed the suitability of proxy measures for the four business model dimensions. The measures developed in this paper will help academician to conduct the longitudinal studies. On practice front, these measures may help managers to analyze the firm’s performance or competitiveness with reference to BMDs. The current literature is still evolving when it comes to measuring the constructs related to business model dimensions. This paper is an attempt to contribute in that direction.

Appendices

Appendix 1: Proxy Measure Development Process

See Figs. 4, 5, 6, 7.

Appendix 2: Documentation of Proxy Measure Development Process

Scale item	Indicator	Tactical decision	Strategic imperative	Proxy measure	Remark
CI01	Firm’s customer includes several distinct but interdependent groups (i.e. presence or activities of a group increases the value for other groups) For example: if more people subscribe to a particular newspaper, the advertisers will be willing to pay more for an advertisement in that newspaper	Increase the number of products and services (to fulfill each customer group requirements)	Products and services are customized	Number of products and services	Su et al. (2004)
		Revenue from each customer group will be very small	Revenue is spread-out to many customer groups
		More efforts for advertisement and promotion	Selling and distribution cost will be high		Selling and distribution cost was taken as one more proxy measure for Monetarization. The expert group was of the opinion that it will be more suitable for Monetization than for Customer Identification
CI02	Firm uses open value creation process where customer groups can co-create and collaborate to create value for them and for other	Ensure the involvement of the customer in the value creation process	Products and services are customized	Number of products and services	Su et al. (2004)
		Customer-centric design approach	Products and services are customized
		Value creation without much of internal cost	Operating margin will be very high		The operating margin was taken as one of the performances measures. Hence, it was not considered here
CI03	Firm uses a multi-sided platform (a system of components and interactions) which facilitate interactions (or transactions) between two or more distinct but interdependent customer or user groups	Ensure higher interactions among customer groups	Revenue from product and service are interrelated	Internal consistency of revenue from products and services	Filistrucchi (2018)
		Cross-selling opportunities
		Customer interface is technology-enabled	No specific strategic imperatives		No specific strategic imperatives
CI04	Firm’s analyzes interactions between customer groups to identify which group creates value for other(s)	Analyze interactions between customer groups	Revenue from product and service are interrelated	Internal consistency of revenue from products and services	Filistrucchi (2018)
		Cross-selling opportunities
CE01	Firm’s buyers influence design, production, or distribution/delivery of products/services. That is, customer preferences/requirements will have a significant impact on the design, production, or distribution/delivery of products/services	Allow the buyer to influence the value creation process	Revenue from more number of products and services	Spread of income from products and services = (1/Concentration Index)	Su et al. (2004)
		More customized products
CE02	Firm attempt to personalize the products/services to increase sales	Personalize the products and services as per customer requirements	Revenue from more number of products and services	Spread of income from products and services = (1/Concentration Index)	Su et al. (2004)
		More customized products
		Higher R&D required for different products	R&D cost will be relatively higher		Not all customization will need R&D efforts
CE03	Firm bundles its core offerings with its other related product and service to meet customer-specific needs/requirements	Bundle the core offerings with its other related product and service to meet customer-specific needs/requirements	Revenue from more number of products and services	Spread of income from products and services = (1/Concentration Index)	Su et al. (2004)
		Follow Assemble-to-Order approach	Higher labor involvement	Labor cost to total cost ratio	Martin and Ishii (1996)
CE04	Firm combines its capabilities which the firm uses to offer products/services to meet customer-specific needs/requirements	Use generic capabilities which can be combined	Combining requires higher labor efforts
		Use higher skill people to handle frequent changes	Combining will incur higher labor costs
		Higher production engineering will be required
CE05	Firm combines various technologies which it uses to offer products/services to meet customer-specific needs/requirements	Use generic technologies which can be combined	Combining requires higher labor efforts	Labor cost to total cost ratio	Martin and Ishii (1996)
			The cost of technologies will be comparatively lower
		Higher production engineering will be required	Combining requires higher labor efforts
CE06	Firm combines various resources which it uses to offer products/services to meet customer-specific needs/requirements	Use generic resources which can be combined	Combining requires higher labor efforts	Labor cost to total cost ratio	Martin and Ishii (1996)
			The cost of resources will be comparatively lower
		Higher production engineering will be required	Combining requires higher labor efforts
VC01	Firm’s network partners (suppliers, service providers, etc.) can make informed decisions. Because the firm shares the required information with its network partners	Involve network partners in the value creation process	More value creation by network partners	(Total cost − internal cost) to total cost ratio	González et al. (2016)
		Network partners are connected on Local Area Network	Local Area Network usage will be comparatively higher for the given sales	It is more of an internal phenomenon and it is not reported on public domain
VC02	Firm’s network partners (suppliers, service providers, etc.) have access to the information about the range of products and services	Involve network partners in the value creation process	More value creation by network partners	(Total cost − internal cost) to total cost ratio	González et al. (2016)
		Network partners are connected on Local Area Network	Local Area Network usage will be comparatively higher for the given sales	It is more of an internal phenomenon and it is not reported on public domain
VC03	Firm’s network partners (suppliers, service providers, etc.) are linked to transactions in novel/innovative ways	Involve network partners in the value creation process	More value creation by network partners	(Total cost − internal cost) to total cost ratio	González et al. (2016)
		Network partners are connected on Local Area Network	Local Area Network usage will be comparatively higher for the given sales	It is more of an internal phenomenon and it is not reported in the public domain
VC04	Firm’s network partners would like to continue transactions with the firm because they are familiar with transaction environment and processes	Ensure long term relationship with network partners	Less investment in own resources	(Total cost − depreciation cost) to total cost ratio	González et al. (2016)
		Deal with less number of network partners	Value creation per network partner will be high	This information is not reported in the public domain. But this can be gauged by (total cost − depreciation cost) to total cost ratio
		Ensure long term relationship with network partners	Change in number of network partners will be less	This information is not reported in the public domain
VC05	Firm is able to create communities/social groups that bond customers and network partners to the firm to ensure long-lasting relationship with them	Ensure long term relationship with network partners	Less investment in own resources	(Total cost − depreciation cost) to total cost ratio	González et al. (2016)
		Deal with less number of network partners	Value creation per network partner will be high	This information is not reported in the public domain. But this can be gauged by (total cost − depreciation cost) to total cost ratio
		Ensure long term relationship with network partners	Change in number of network partners will be less	This information is not reported in the public domain
MN01	The price of the firm’s products/services depends on available inventory at that time and time of purchase	Changes in pricing	Offer a discount to adjust the prices	Discount and commission to sales ratio	Danzon and Towse (2003), (Washington, DC: U.S. Patent and Trademark Office. Patent No. U.S. Patent No. 7,133,848, 2006)
		Prices are not fixed or kept very high, so that later on discount can be given to change the actual prices at which products are sold	Later, give a discount to change the actual prices at which products are sold
		Keep prices high when inventory is low	Later, give a discount to change the actual prices at which products are sold
MN02	The price of the firm’s products/services is established dynamically based on supply and demand	Changes in pricing	Offer a discount to adjust the prices	Discount and commission to sales ratio	Danzon and Towse (2003), (Washington, DC: U.S. Patent and Trademark Office. Patent No. U.S. Patent No. 7,133,848, 2006)
		Prices are not fixed or kept very high	Later, give a discount to change the actual prices at which products are sold
		Keep prices high when demand is low	Later, give a discount to change the actual prices at which products are sold
MN03	Payments for the products and services offered by the firm are made by someone not necessarily the consumer of the products and services. For example—Newspaper total cost is recovered from subscription and advertisers. Wi-Fi is provided to the users as free and the cost is recovered from someone else (in some cases advertisers)	Revenue from multiple groups of customers	Incur higher selling expenses	Selling expenses to sales ratio
			Variations in profitability	Coefficient of variance of profitability	Filistrucchi (2018)
MN04	Revenue structure of firm: deliver part of the value proposition as free or at very less cost to attract a large number of users who by their number constitute a source of value. This value is then monetized by transfer of a portion of the free users to the paid users	Subsidize one customer group and cover-up the rest from other customer groups	Incur higher selling expenses	Selling expenses to sales ratio
			Variations in profitability	Coefficient of variance of profitability	Filistrucchi (2018)
MN05	Revenue structure of firm: deliver part of the value proposition as free or at very less cost to attract a large number of users who by their number constitute a source of value. This value is then monetized by charging other customer groups who are willing to pay for this value. For example advertisers	Subsidize one customer group and cover-up the rest from other customer groups	Incur higher selling expenses	Selling expenses to sales ratio
			Variations in profitability	Coefficient of variance of profitability	Filistrucchi (2018)

Appendix 3: Statement for Evaluation of Proxy Measure Logic

• IF the firm’s customer includes several distinct but interdependent groups THEN firm should increase the number of products and services (to fulfill each customer group requirements).

• IF the firm uses an open value creation process (where customer groups can co-create and collaborate to create value for them and for other) THEN products and services will be customized and HENCE the number of products and services, offered by a firm, will be high.

• IF the firm uses a multi-sided platform that facilitates interactions between two or more distinct but interdependent customer or user groups THEN the revenue from product and service, offered to these customer groups will be interrelated.

• IF the firm analyzes the interactions between customer groups and takes decisions accordingly THEN the revenue from product and service, offered to these customer groups will be interrelated.

• IF the firm allows its customers to have influence over the firm’s value creation processes THEN number of products and services, firm offers, will be high and HENCE the revenue will be spread over more number of products and services.

• IF the firm attempt to personalize the products or services to increase sales THEN number of products and service, firm offers, will be high and HENCE the revenue will be spread over more number of products and services.

• IF the firm bundles its core offerings, with its own other related product and service to meet customer-specific needs/requirements, THEN number of products and services, firm offers, will be high and HENCE the revenue will be spread over more number of products and services.

• IF the firm wants to offer customized products and services THEN firm should use generic capabilities which can be combined to generate these customized products and services and HENCE labor efforts required will be higher in this case as compared to a situation where generic capabilities are not used or combined to offer products and services.

• IF the firm wants to offer customized products and services THEN firm should use generic technologies which can be combined to generate these customized products and services and HENCE labor efforts required will be higher in this case as compared to a situation where generic technologies are not used or combined to offer products and services.

• IF the firm wants to offer customized products and services THEN firm should use generic resources which can be combined to generate these customized products and services and HENCE labor efforts required will be higher in this case as compared to a situation where generic resources are not used or combined to offer products and services.

• IF the firm wants to have more value creation by its network partners THEN firm should involve its network partners in the value creation process by sharing the required information with its network partners.

• IF the firm wants to have more value creation by its network partners THEN firm should involve its network partners in the value creation process by providing access to the information about the range of the firm’s products and services.

• IF the firm wants to have more value creation by its network partners THEN firm should involve its network partners in the value creation process by linking them to transactions in the novel and innovative ways.

• IF the firm’s network partners are familiar with the transaction environment and processes THEN they will continue to transact with the firm for the long term and HENCE firm will invest less in its own resources for value creation.

• If the firm is able to create communities or social groups that bond customers and network partners to the firm THEN firm’s network partner will have a long-lasting relationship with the firm HENCE firm will invest less in its own resources for value creation.

• IF the firm wants to adjust the prices of its products and services according to the available inventory of the products THEN firm will offer a higher discount if the available inventory of the product is high and vice versa.

• IF the firm wants to adjust the prices of its product and service according to the demand and supply of the products THEN firm will offer a higher discount if demand is lower than supply and vice versa.

• IF the firm attempts to have revenue for a product and services from multiple groups of customers THEN firm will incur higher selling expenses.

• IF the firm offers certain features of the products and service free to the customer and tries to convert some of these customers to pay for the additional features THEN there will be variations in the profitability of the firm’s products and services in a given period of time.

• IF the firm offers certain feature of the products and service free to the customer and try to get revenue from some other customers who are willing to pay for the free customer (because the other customers get opportunity to advertise to free customers or monetize the data of free customers) THEN there will be variations in the profitability of firms products and services in a given period of time.

Appendix 4: Computation of Proxy Measures

Business model dimensions	Proxy measure	Website	Data source on website	Calculations	Final measure
Customer identification	Number of products and services: CI-P1	https://capitaline.com/SiteFrame.aspx?id=1	Company → Capitaline Plus → Company → Products → Finished Products	Normalized w.r.t to sales No. of products per 1000 crores of sales	Averagea of standardized values of CI-P1 and CI-P2
	Internal consistency of revenue from products and services: CI-P2			Internal consistency was calculated for sources of revenue from different products and service segments over 3 years
Customer engagement	Spread of income from products and services = (1/Concentration Index): CE-P1	https://capitaline.com/SiteFrame.aspx?id=1	Company → Capitaline Plus → Company → Products → Finished Products	Concentration Index: HHI, was calculated for aggregate sales of different products and service segments over 3 years	Averagea of standardized values of CE-P1 and CE-P2
	Labor cost to total cost ratio: CE-P2		Company → Capitaline Plus → Company → Finance → Profit and Loss → X-Detail	CE-P2 = labor cost/total cost
Value creation	(Total cost − internal cost) to total cost ratio: VC-P1	https://capitaline.com/SiteFrame.aspx?id=1	Company → Capitaline Plus → Company → Finance → Profit and Loss → X-Detail	VC-P1 = (total cost − internal cost)/total cost	Averagea of standardized values of VC-P1 and VC-P2
	(Total cost − depreciation cost) to total cost ratio: VC-P2			VC-P2 = (total cost − depreciation cost)/total cost
Monetization	Discount and commission to sales ratio: MN-P1	https://capitaline.com/SiteFrame.aspx?id=1	Company → Capitaline Plus → Company → Finance → Profit and Loss → X-Detail	MN-P1 = Discount and commission/total sales	Averagea of standardized values of MN-P1, MN-P2 and MN-P3
	Selling expenses to sales ratio: MN-P2			MN-P2 = Selling expenses/total sales
	Coefficient of variance of profitability: MN-P3	https://www.moneycontrol.com	Company → Financials → Ratio → PBIDT	Coefficient of variance of profitability = standard deviation of PBDIT/average of PBDIT

1. ^aImportance of each indicator is considered to be same. Because in weighted average method it is often difficult to set the weights with proper justification Ramanathan and Ganesh (1994). Hence, the simple average (which assumes same weightage) was considered.