between offices. The element "govenance"refers to the structure of contractual arrangements that confer decision rights regarding policies or assets. For example, a given business model may contain as a"choice"the use of certain assets such as a fleet of trucks. The fleet can be owned by the company or leased from a third party. As literature on transaction cost economics shows(see, for example, Williamson, 1980), seemingly innocuous differences in governance of assets and policies may have dramatic effects on the effectiveness of a given business model. A consequence is flexible if it is sensitive to the choices that generate it. For example, large volume is a consequence of a policy of low prices. If the policy changes to high prices, volume is likely to fall rapidly. In contrast, a rigid consequence is one that does not change rapidly with the choices that generate it. For example, a"culture of frugality"is a consequence that changes only slowly with the choices that generate it. Perhaps a more tangible example is an installed base of PCs"which is (partly) a consequence of prices set by Intel and Microsoft for the microprocessor and the operating system, respectively. As prices change the installed base changes slowly: it is a rigid consequence. Clearly, no consequence is purely flexible or purely rigid. All consequences are somewhere in between; it is a matter of degree Business Model Representations A useful way to represent business models is by means of a causal-loop diagram(Baum and Singh, 1994): choices and consequences linked by arrows representing causality. However, except possibly for the simplest organizations, such a representation rapidly becomes highly complex and often intractable. In principle, one could make the effort of listing every choice made by management (although this would take a very long time). More difficult, perhaps, is to list the set of all consequences of those choices and to spell out exactly how choices (and different combinations of choices) deliver those consequences, and how exactly consequences (and different combinations of consequences) enable choices. In most businesses there are large numbers of choices and consequences. An analysis and evaluation of an organizations business model that takes into consideration every choice and every consequence is just impractical: nothing meaningful can be concluded by considering choices and consequences in full richness of detail To overcome this issue, we work with representations of business models (or models of business models). A business model representation consists of (i) choices (generally a subset of all choices), (i) consequences (generally a subset of all consequences), and (ii)theories Notice the third element: theories. Theories are suppositions on how choices and consequences are related. For example, a theory may be that as r&D expenses increase, products with innovative features are brought to market. In the causal loop diagram, we would have an arrow from"high R&D expenses"to "innovative products. In many cases theories are commonly accepted relationships open to little discussion. Other times, however,theories"are controversial. In the 1960s, Sam Walton believed that large volumes of merchandise would be Notice that intangible assets such as experience, brand equity, or even the value of patents are consequences generally rigid), not choices. Notice that disciplines such as economics, sociology, or psychology are, for the most part, devoted to generating theories. For example, there is a large body of economic literature devoted to understanding how incentives affect performance. These theories are distilled in our business model representation by use of a simple arrow (or a few arrows)connecting choices and consequences. Disciplines look at the arrows with great care, but have little concern bout how arrows interact with one another and contribute to making the whole of a business model4 - IESE Business School-University of Navarra between offices.2 The element “governance” refers to the structure of contractual arrangements that confer decision rights regarding policies or assets. For example, a given business model may contain as a “choice” the use of certain assets such as a fleet of trucks. The fleet can be owned by the company or leased from a third party. As literature on transaction cost economics shows (see, for example, Williamson, 1980), seemingly innocuous differences in governance of assets and policies may have dramatic effects on the effectiveness of a given business model. A consequence is flexible if it is sensitive to the choices that generate it. For example, large volume is a consequence of a policy of low prices. If the policy changes to high prices, volume is likely to fall rapidly. In contrast, a rigid consequence is one that does not change rapidly with the choices that generate it. For example, a “culture of frugality” is a consequence that changes only slowly with the choices that generate it. Perhaps a more tangible example is an “installed base of PCs” which is (partly) a consequence of prices set by Intel and Microsoft for the microprocessor and the operating system, respectively. As prices change, the installed base changes slowly: it is a rigid consequence. Clearly, no consequence is purely flexible or purely rigid. All consequences are somewhere in between; it is a matter of degree. Business Model Representations A useful way to represent business models is by means of a causal-loop diagram (Baum and Singh, 1994): choices and consequences linked by arrows representing causality. However, except possibly for the simplest organizations, such a representation rapidly becomes highly complex and often intractable. In principle, one could make the effort of listing every choice made by management (although this would take a very long time). More difficult, perhaps, is to list the set of all consequences of those choices and to spell out exactly how choices (and different combinations of choices) deliver those consequences, and how exactly consequences (and different combinations of consequences) enable choices. In most businesses there are large numbers of choices and consequences. An analysis and evaluation of an organization’s business model that takes into consideration every choice and every consequence is just impractical: nothing meaningful can be concluded by considering choices and consequences in full richness of detail. To overcome this issue, we work with representations of business models (or models of business models). A business model representation consists of (i) choices (generally a subset of all choices), (ii) consequences (generally a subset of all consequences), and (iii) theories. Notice the third element: theories. Theories are suppositions on how choices and consequences are related. For example, a theory may be that as R&D expenses increase, products with innovative features are brought to market. In the causal loop diagram, we would have an arrow from “high R&D expenses” to “innovative products.” In many cases theories are commonly accepted relationships open to little discussion.3 Other times, however, “theories” are controversial. In the 1960s, Sam Walton believed that large volumes of merchandise would be 2 Notice that intangible assets such as experience, brand equity, or even the value of patents are consequences (generally rigid), not choices. 3 Notice that disciplines such as economics, sociology, or psychology are, for the most part, devoted to generating theories. For example, there is a large body of economic literature devoted to understanding how incentives affect performance. These theories are distilled in our business model representation by use of a simple arrow (or a few arrows) connecting choices and consequences. Disciplines look at the arrows with great care, but have little concern about how arrows interact with one another and contribute to making the whole of a business model