Henry Chesbrough posits six types of business model, ranging from the basic to the highly sophisticated:

1 Undifferentiated business model

Companies compete on price and availability. While this model reduces the cost of entry into new markets, it is very difficult to sustain a competitive advantage.

2 Some differentiation in business model

Their customers are not just concerned with availability and price, but also with product or service performance. Chesbrough sees many technology-based, start-up companies with this business model. They are trying to sell a new technology that has some small degree of differentiation.

3 Segmented business model

Type-two companies that win the battle for the dominant design often find themselves progressing to type-three companies. Although the company innovates its products, services and processes, it does not innovate its business model.

4 Externally aware business model

This is a more open business model where ideas are sought externally and risk is lower. This company ‘shares the risks of new products and processes with other parties’.

5 Company integrates its innovation process with its business model

The type-five business model uses its understanding of customers and suppliers to identify discrepancies and disconnections between the customer’s or supplier’s business model and the company’s own business model, both in the current organisation and new business areas.

6 Business model is able to change, and is changed by the market

This is the same as a type-five company, but with the additional benefit flexibility through being able to innovate its own business model. This requires a commitment to experimentation with one or more business model variants.

Henry Chesbrough is author of Open Business Models – How to Thrive in the New Innovation Landscape, Harvard Business School Press