On Testing Business Models

Abstract:     
This study explored management decisions regarding formal empirical testing of business models. It documented a test of one company’s business model under seemingly favorable conditions for such a test – a successful single product firm following a consistent strategy over a long period of time with stable management and publicly traded stock. Although the findings provided only weak support for the hypothesized business model, the confidence of the company’s top managers in their business model remained high. Further analysis revealed that the managers’ response to the test results was consistent with that expected of Bayesian-rational agents. Our analyses provided the basis for development of a framework for understanding the expected value of testing business models in various circumstances. This framework may explain apparent contradictions between previous studies containing normative statements regarding the value of testing business models.

Number of Pages in PDF File: 44

Keywords: Performance measurement, non-financial performance measures, business models, management control

JEL Classification: L21, M10, M41

working papers series