USING CASUAL LOOP DIAGRAM TO BETTER
UNDERSTANDING OF e-BUSINESS MODELS
M. R. Gholamian, A. Hamzehei
Department of Electronic Commerce, Iran University of Science and Technology (IUST), Narmak, Tehran, Iran
B. Kiani
Green Research Center, Iran University of Science and Technology (IUST), Narmak, Tehran, Iran
S.H. Hosseini
Department of Industrial Engineering, Iran University of Science and Technology (IUST), Narmak, Tehran, Iran
Keywords: e-Business, e-Business model, Causal loop diagram.
Abstract: Using the concept of business models can help companies understand, communicate, share, change,
measure, simulate and learn more about the different aspects of e-business in their firms. Better
understanding of e-business models helps managers and related staffs to better apply the business model.
The main objective of this paper is to use Causal Loop Diagram (CLD) as a useful tool to capture the
structure of e-business systems in order to achieve a better understanding of an e-business model. The
proposed CLD gives a helpful insight which is useful for managers to learn more about the e-business
model.
1 INTRODUCTION
We live in a competitive, rapidly changing and an
increasingly uncertain economic environment that
makes business decisions complex and difficult.
Companies are confronted with new information and
communication technologies, shorter product life
cycles, global markets and tougher competition. In
this hostile business environment firms should be
able to manage multiple distribution channels,
complicated supply chains, expensive IT
implementations, and strategic partnerships and still
stay flexible enough to react to market changes.
Astonishingly, the concepts and software tools that
help managers facilitate strategic business decisions
in this difficult environment are still scarce
(Osterwalder, 2004). Every manager and
entrepreneur does have an intuitive understanding of
the company’s business model, but even though this
business model influences all important decisions, in
many cases she or he is rarely able to communicate
it in a clear and simple way (Linder and Cantrell,
2000). How can one decide on a particular business
issue or change it, if it is not clearly understood by
the parties involved? Therefore, it would be
interesting to think of a set of tools that would allow
business people to understand what their business
model would be and of what essential elements it
could be composed of, tools that would let them
easily share this model to others and that would let
them change and play around with it in order to
learn about business opportunities (Osterwalder,
2004).
A business model is often defined as an
architecture for the product, service and information
flows, including business actors, potential benefits,
and sources of revenues, or as a method for
managing resources to provide better customer
values and make money (Afuah and Tucci, 2001;
Terano and Naitoh, 2004; Chien-Chih Yu, 2005).
Above all, a business model is a model of a
business. A model, on the other hand, is only an
artificial representation of reality. It therefore has to
detract focus from certain aspects while

concentrating on others; it is impossible for all the
variables that comprise reality to be adequately and
consistently represented, particularly if the goal is to
control for the effect of certain factors over others. A
model can be descriptive or predictive, but in many
cases people would not rely on the outcomes of the
model only, when making a decision. This is
because a model cannot (and should not) be a
complete and precise representation of reality—even
for very simple social systems. Even if it could,
people would not recognize it as such, because as
what is considered to be important for the model
depends on the position of the observer (Petrovic et
al., 2002).
Recalling all said above, the importance of an e-
business model usage in the performance of an e-
business model is brightly evident. In the other hand,
a good understanding of e-business model has a
great impact on the quality and level of its
utilization. Therefore, in this paper, we will use
Causal Loop Diagram (CLD) as a useful tool to find
out the structure of e-business systems in order to
achieve a better understanding of an e-business
model. To do so, we will use a specific e-business
model, called e-Business Model Ontology (BMO).
Following, in the paper, in the next section we
describe the BMO and its building blocks. In the
section 3, CLD will be introduced and finally we
will show how CLD can be used to give a better
understanding and explaining of e-business model
especially BMO.
2 e-BUSINESS MODEL
ONTOLOGY
Alexander Osterwalder in 2004 worked on an E-
Business model which includes almost all areas of
E-Business as his doctoral thesis. This section tries
to explain his model named E-Business Model
Ontology. This E-Business model is an ontology that
allows to accurately describing the business model
of a firm. Influenced by the Balanced Scorecard
approach (Kaplan and Norton, 1992), and more
generally business management literature (Markides,
1999) suggested adopting a framework which
emphasizes on the following four areas that a
business model has to address:
 Product: What business the company is in, the
products and the value propositions offered to
the market.
 Customer Interface: Who the company's target
customers are, how it delivers products and
services to them, and how it builds a strong
relationship with them.
 Infrastructure Management: How and with
whom the company efficiently performs
infrastructural or logistical issues, and under
what kind of network enterprise.
 Financial Aspects: What is the revenue model,
the cost structure and the business model’s
sustainability?
These four areas can be compared to the four
perspectives of Norton and Kaplan's Balanced
Scorecard approach (Kaplan and Norton, 1992). The
Balanced Scorecard is a management concept
developed in the early 90s that helps managers
measure and monitor indicators other than purely
financial ones. Norton and Kaplan identify four
perspectives of the firm on which executives must
keep an eye to conduct successful business. From
the customer perspective the company asks itself
how it is being seen by its customers. From the
Internal perspective, the company reflects on what it
must excel at. From the innovation and learning
perspective the company analyzes how it can
continue to improve and create value. Finally, from
the financial perspective a company asks itself how
it looks at shareholders. While the four areas are a
rough categorization the nine elements are the core
of the ontology. These elements, presented in Table
1, are a synthesis of the business model literature
review and consist of value proposition, target
customer, distribution channel, relationship, value
configuration, capability, partnership, cost structure
and revenue model. Figure 1 gives the reader a first
impression of the business model ontology and
depicts how the mentioned Business Model
Ontology elements are related to each other.
Every business model element can be
decomposed into a set of defined sub elements. As
illustrated in the graphical descriptions and defined
in the tables, element and sub-elements are related to
each other through "setof" and "isA" relationships.
Product covers all aspects of what a firm offers its
customers. This comprises not only the company's
bundles of products and services but the manner in
which it differentiates itself from its competitors.
Product is composed of the element value
proposition, which can be decomposed into its
elementary offering(s) (see Figure 2).

Table 1: The nine business model building blocks (Osterwalder, 2004).
Pillar Building Block of
Business Model
Description
Product
Value Proposition
A Value Proposition is an overall view of a company's bundle of products and services
that are of value to the customer.
Customer
Interface
Target Customer
The Target Customer is a segment of customers a company wants to offer value to.
Distribution Channel
A Distribution Channel is a means of getting in touch with the customer.
Relationship
The Relationship describes the kind of link a company establishes between itself and the
customer.
Infrastructure
Management
Value Configuration
The Value Configuration describes the arrangement of activities and resources that are
necessary to create value for the customer.
Capability
A capability is the ability to execute a repeatable pattern of actions that is necessary in
order to create value for the customer.
Partnership
A Partnership is a voluntarily initiated cooperative agreement between two or more
companies in order to create value for the customer.
Financial
Aspects
Cost Structure
The Cost Structure is the representation in money of all the means employed in the
business model.
Revenue Model
The Revenue Model describes the way a company makes money through a variety of
revenue flows.

Figure 1: The Business Model Ontology (Osterwalder, 2004).
The element value proposition is an overall view
of one of the firm's bundles of products and services
that together represent value for a specific customer
segment.
Figure 2: Product.
It describes the way a firm differentiates itself
from its competitors and is the reason why
customers buy from a certain firm and not from
another one.
The target customer is the second element of the
business model ontology (Figure 3). Selecting a
company's target customers is all about the
segmentation. Effective segmentation enables a
company to allocate investment resources to target
customers that will be most attracted by its value
proposition. The target customer definition will also
helps a firm to define through which channels it
effectively wants to reach its clients. In order to
refine a customer segmentation companies usually
decompose a target customer segment into a set of
further characteristics called criterion.
Figure 3: Target Customer.

The distribution channel is the third element of
the business model ontology (Figure 4). Distribution
channels are the connection between a firm's value
propositions and its target customers. A distribution
channel allows a company to deliver a value to its
customer directly. A distribution channel describes
how a company gets in touch with its customers. Its
purpose is to make the right quantities of the right
products or services available at the right place, at
the right time to the right people (Pitt and Berthon,
1999).
Figure 4: Distribution Channel.
The fourth element of the business model
ontology concerns the relationships a company
builds with its customers (Figure 5). All customer
interactions between a firm and its clients affect the
strength of the relationship a company builds with
its customers. But as interactions come at a given
cost, firms must carefully define what kind of
relationship they want to establish with what kind of
customer. Profits from customer relationships are the
lifeblood of all businesses. These profits can be
achieved through the acquisition of new customers,
the enhancement of profitability of existing
customers and the extension of the duration of
existing customer relationships. Companies must
analyze customer data in order to evaluate what type
of customer they want to seduce and acquire,
whether they are profitable and worth spending
retention efforts or not and whether they are likely to
be subjected to add-on selling or not (Blattberg and
Getz, 2001). Then firms must define the different
mechanisms they want to use to create and maintain
a customer relationship and leverage customer
equity.
Figure 5: Relationship.
Capability is the fifth element of the business
model ontology (Figure 6). Capabilities described as
repeatable patterns of action in the use of assets to
create, produce, and/or offer products and services to
the market. Thus, a firm has to dispose of a set of
capabilityies in order to provide its value
proposition. These capabilities depend on the assets
or resources of the firm. And, increasingly, they are
outsourced to partners, while using e-business
technologies to maintain the tight integration that is
necessary for a firm to function efficiently.
Figure 6: Capability.
The value configuration is the sixth element of
the business model ontology (Figure 7). The value
configuration of a firm describes the arrangement of
one or several activity (ies) in order to provide a
value proposition. As outlined above, the main
purpose of a company is the creation of value that
customers are willing to pay for. This value is the
outcome of a configuration of inside and outside
activities and processes. The value configuration
shows all activities necessary and the links among
them, in order to create value for the customer.
Figure 7: Value Configuration.
The seventh element of the business model
ontology is the partnership network. A partnership
is a voluntarily initiated cooperative agreement
formed between two or more independent
companies in order to carry out a project or specific
activity jointly by coordinating the necessary
capabilityies, resources and activityies. A
company’s partner network outlines which parts of
the activity configuration and which resources are
distributed among the firm’s partners.

Figure 8: Partnership.
The REVENUE MODEL is the eighth element
of the business model ontology and it measures the
ability of a firm to translate the value it offered to its
customers into money and incoming revenue
streams.
Figure 9: Revenue Model.
This element measures all the costs the firm
incurs in order to create, market and deliver value to
its customers. It sets a price tag on all the resources,
assets, activities and partner network relationships
and exchanges that cost the company money. As the
firm focuses on its core competencies and activities
and relies on partner networks for other non-core
competencies and activities there is an important
potential for cost savings in the value creation
process.
Figure 10: Cost Structure.
3 CAUSAL LOOP DIAGRAM
Yet our mental models often fail to include the
critical feedbacks determining the dynamics of our
systems. A useful way to capture the structure of
systems is causal loop diagram (CLD) (Sterman,
2000). The casual loop diagram represents the way
in which a system works. The primary purpose of
the CLD is to depict casual hypothesis, so as to
make the presentation of the structure in an
aggregate form. The CLD helps the user to quickly
communicate the feedback structure and underlying
assumptions (Sushil, 1993). CLDs are an important
tool for representing the feedback structure of
systems. Long used in academic work, and
increasingly common in business, CLDs are
excellent for (Sterman, 2000):
 Quickly capturing your hypotheses about the
causes of dynamics;
 Eliciting and capturing the mental models of
individuals or teams;
 Communicating the important feedbacks you
believe are responsible for a problem.
A causal diagram consists of variables connected
by arrows denoting the causal influences among the
variables. The important feedback loops are also
identified in the diagram. Variables are related by
causal links, shown by arrows (Sterman, 2000). The
casual relationship depicts that one element affecting
another element. A causal loop diagram has been
used to model this causality relationship. Positive
relationship refers to ‘a condition in which a casual
element, A, results in a positive influence on B,
where the increase of A value responds to the B
value with a positive increase’ and Negative
relationship refers to ‘a condition in which a causal
element, A, results in a negative influence on B,
where the increase of A value responds to the B
value with a decrease’ (Richardson, 1986).
Link polarities describe the structure of the
system. They do not describe the behavior of the
variables. That is, they describe what would happen
IF there were a change. They do not describe what
actually happens. The causal diagram doesn’t tell
you what will happen. Rather, it tells you what
would happen if the variable were to change
(Sterman, 2000).
The important loops are highlighted by a loop
identifier which shows whether the loop is a positive
(reinforcing) or negative (balancing) feedback. The
dynamic behavior of the system can be caused by a
feedback loop, and there are two types of feedback:
reinforcing (R) and balancing (B). As shown in
figure 11, increases in population increases the
number of birth, which again increases the overall
population. It is a reinforcing loop. In the contrary,
the greater the population, the higher the number of
deaths, and then the population decrease. It is a
balancing loop. In addition, it is not easy to
understand the complexity involved with the
dynamic changes among elements and the target

system in which casual relationships and feedback
loops exist.
Population
Death Rate
Birth Rate
+
-
+
+
Figure 11: The diagram of casual relationship.
In the next section we will develop a CLD to
explain the logic and structure of the introduced e-
business model and consequently we will show how
that CLD is validated.
4 USING CLD TO BETTER
UNDERSTANDING OF BMO
In this section Casual Loop Diagram is used to give
a better understanding of introduced e-business
model which was in pervious section. The CLD is
drawn based on the BMO; it explains the logic of
model and shows the interaction of each model
building blocks; it also facilitates the understanding
of the model and consequently facilitates the
applying of it. We draw a simple CLD which only
shows the main loops and main interactions in order
to having a well-defined CLD that is consistent with
the purpose of this paper. Figure 12 shows the CLD.
There are six loops shown partially in different
colors in the figure as follows:
 PROSPERITY (balancing loop; in blue)
 OFFERING (reinforcing loop; partially in red)
 RESOURCE SUPPLEMENT (balancing loop;
partially in green)
 ACTIVITY ARRANGEMENT (balancing
loop; partially in purple)
 CHANNEL ADJUSTMENT (balancing loop;
in orange)
 CUSTOMER RELATIONSHIP CONTROL
(reinforcing loop; partially in black)
Following, we describe these loops:
The logic of the first loop, named
PROSPERITY, is as follows: As Capabilities
increase, ceteris paribus, with correct management,
the Offering of company increases. This rise in
Offering, ceteris paribus, causes a rise in the Value
which proposed to the customer; therefore, as a
result, Customer population increases due to a
higher value proposition which satisfied customers.
This increase causes an increase in Revenue.
Consequently, this rise, ceteris paribus, causes an
increase in Profit and then causes an increase in the
dedicated amount of profit for raising Resources
which closes the loop and ensures that, ceteris
paribus, over time Capabilities will be higher than it
otherwise would have been. This loop shows the
interaction of the all four blocks of the model
showed in Figure 1: INFRASTRUCTURE,
PRODUCT, CUSTOMER INTERFACE, and
FINANCIAL ASPECTS.
The logic of the second loop, named
OFFERING, is as follows: As in pervious loop
mentioned, an increase in Capabilities finally causes
a rise in Value Proposition which causes having
more Costs. This rise in costs, ceteris paribus, causes
a decrease in Profit which causes a fall in the
dedicated amount of profit for raising Resources.
This fall closes the loop and ensures that, ceteris
paribus, over time Capabilities will be lower than it
otherwise would have been. This loop shows the
interaction of the three blocks of the model showed
in Figure 1: INFRASTRUCTURE, PRODUCT, and
FINANCIAL ASPECTS.
The logic of the third loop, named
 RESOURCE
SUPPLEMENT, is as follows: A fall in Capabilities
causes a rise in Partnership since the company needs
more investment to improve its Resources and
consequently its Capabilities. A rise in Partnership,
as said, causes a rise in Funding and therefore,
ceteris paribus, causes a rise in Resources. This
closes the loop and ensures that, ceteris paribus, over
time Capabilities will be higher than it otherwise
would have been. This loop shows the interaction of
one block of the model showed in Figure 1:
INFRASTRUCTURE.
The logic of the fourth loop, named ACTIVITY
ARRANGEMENT, is as follows: A fall in
Capabilities causes a rise in Partnership for the
reason that the company needs more Capabilities
and more abilities to configure these Capabilities in
order to more Offering. As Partnership rises the
Ability of company to configure the Capabilities
rises and, ceteris paribus, it causes a rise in Offering.
As said above, this finally raises Capabilities. This
loop shows the interaction of the two blocks of the
model showed in Figure 1: INFRASTRUCTURE
and PRODUCT.
The logic of the fifth loop, named CHANNEL
ADJUSTMENT, is as follows: As Customer
Identification increases, the Compatibility of
Linking Channel which company chooses to make
relationship with customers rises. This, ceteris paribus,
causes a rise in the Performance of Linking Channel.


Figure 12: The Casual Loop Diagram of e-Business Model Ontology.
This rise and the type of Mechanisms which
company uses finally raise the total Performance of
Relationship with customers. When company has a
good insight about its customers and its customer
Relationship Performance is high, the company
makes fewer efforts for Identification of its
customers because it knows the customers very
well. It is obvious that when customer Relationship
Performance rises the Customer population rises
too. This loop performs in one block of the model
showed in Figure 1: CUSTOMER INTERFACE.
There is another loop which shows the
relationship between the last loop (CHANNEL
ADJUSTMENT) and others which named as
CUSTOMER RELATIONSHIP CONTROL; as
Relationship Performance increases, with
sufficient and excellent Value Proposition,
Customer population rise; the increase in
Customers, with appropriate Mechanisms, causes a
rise in Relationship Performance.
The main loops, which produce the dynamic
behavior, are described above. In the section 2 the
models building blocks is introduced and the
constituted components is delineated. In this
section we tried to show the relationships and the
impacts of building blocks on each others. The
readers that have an understanding with these
relationships and impacts could have better
understanding of BMO; therefore, this will be
useful for practical purposes.
5 CONCLUSIONS
A business model is often defined as architecture
for the product, service and information flows,
including business actors, potential benefits, and
sources of revenues, or as a method for managing
resources to provide better customer values and
making money. The importance of an e-business
model usage in the performance of an e-business
model is brightly evident. In the other hand, a good
understanding of e-business model has a great
impact on the quality and level of its utilization.
Therefore, in this paper, we used CLD as a useful
tool to capture the structure of e-business systems
in order to achieving a better understanding of an
e-business model. To do so, we used a specific e-
business model, called e-Business Model Ontology
(BMO) and described its building blocks. In the
section 3, CLD is introduced and finally we
showed how CLD can be used to give a better
understanding and explaining of e-business
models, especially BMO. Further research could
be drawing of the Stock Flow Diagram (SFD)
which can be used for sensitivity analysis, scenario
building, and policy analysis for practical
purposes. The limitation of this research is
investigating this approach in a case study in order
to find a practical usage of this research.

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