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Introduction to Business Model
Before you go further in reading this document I want you to pause and answer one question. How do you define Business Model? If you take the time to create a thoughtful response to that question you will gain more from what I have to say.
The term business model often surfaces when CEOs are reporting on the success (or failure) of their companies. They use the term in so many ways that it brings doubts as to just how well they understand what a business model actually is. The next time you hear the phrase being used try to understand exactly what they are talking about. See if you can conceptualize their description.
I have found it difficult to do that because when many leaders are saying Business Model what they are referring to are vague images in their minds of what their business should look and act like. It is more of a transient vision statement than an actual model. Unfortunately for them, and those that work for them, that apparition exists only in their minds. And to make matters worse that ghostly image is unintentionally evolving. What was there three months ago has morphed into something new without anyone else knowing, even though there are projects and initiatives underway to try and capture the earlier vision. If the model is not visible how does one go about building it? How can a group of executives ‘know’ they have a common understanding of the desired model if none of them are looking at a model?
There was one company that had three executives and a strategy consultant spend nine months developing a strategic plan. The management team needed to have a plan in place in order to meet certain goals. At the end of the process the group had settled on a particular corporate direction and some of the key strategies needed to make their vision come true. The most important strategy centered on the company having a ‘World Class Supply Chain Management System’ put into place. The CEO upon being asked to clarify what that would look like stated that the company would spend exactly what it took to give the customer exactly what it wanted. If the company spent one dime more than was necessary then that would be a problem. The CFO was asked the same question and he responded that being a world class Supply Chain management meant studying Wal-Mart, P&G and Dell and developing something superior to their processes.
Compare those responses and ask yourself if you think both of those people had the same vision in mind. It is obvious that they didn’t. Here were two people who had spent considerable time together to co-develop the strategy, could repeat the words of the strategy but weren’t on the same page when it came to how to execute that strategy. That is the danger of language – assuming we all mean the same thing when words are being used.
The term Business Model can also be found in the world of academia. In undergraduate business studies but especially in MBA programs the phrase is often used. Case studies of companies typically refer to their business models. The term is used hundreds if not thousands of times in the course of obtaining an advanced degree.
Since the phrase is so widely used in business and universities wouldn’t it be reasonable to expect a common definition? From seeing that term used in many different ways I came to the conclusion that people don’t share a common understanding of what constitutes a Business Model.
To verify my suspicions I conducted two surveys. One was with a group of business people and university students and the other was with a graduate business class. The audience in both cases was there to listen to a presentation I was going to make on the concept of Business Models. Prior to taking the surveys I asked those present to raise their hand if they were familiar with the term Business Model. Every person showed me they ‘knew’ what the term meant. My next instruction was for them to write down their definition on the piece of paper I had given them without conferring with anyone else. I was not looking for a homogenized version of the term but wanted to hear from each person individually. I also asked them not to include their name. What they had to say was more important than who said it.
I collected and recorded all the responses and now have dozens of different Business Model definitions. Allow me to share the beginning of just seven of them.
- A business model is a process ….
- Business model is the technical design …
- A business model is a description ….
- Rules and goals of the business as a whole.
- The method of running the business …
- A plan …..
- The strategies needed ….
As you can see from just these definitions my hypothesis was confirmed. Every one of those definitions is very different than the others. A description is certainly different than a process. Rules and strategies bear no resemblance to each other or any of the other descriptions in that list. There is a vast array of ideas being applied to the concept of Business Model.
The question begs to be asked: “How can business leaders and students attending the same university, studying the same field, have such a large array of definitions for one of the most basic business concepts?”
I think I know why.
It is not unlike the parable of the seven blind men and the elephant shown below. None of the seven men had ever experienced an elephant before and therefore had no basis or context for this magnificent creature. Each blind man was asked to describe an elephant. The first one touched the tail and described it as a rope. The second one touched a leg and said it was like a tree. One touched a tusk, another an ear, another the back,… While each man’s description of the elephant was technically correct if a person took only that one perspective s/he could not know what an elephant looks like.
In order for those men, or anyone else for that matter, to know what an elephant looks like they need to know all of its parts and their relationship to each other. By viewing each part individually it is not possible to know what any complex entity looks like.
A business is a very complex entity. Now mentally substitute the elephant in the story about with the idea of a Business Model. Scan the list of seven different definitions from my surveys and understand that each of those definitions is just one part of the business model.
I have come to understand that the reason why I receive so many different definitions for a Business Model is because it isn’t just one thing. Plans, rules and regulations, processes, strategies, design,.. are all different parts of the Business Model elephant. Each piece doesn’t capture the totality of the entity but it does provide one glimpse.
That doesn’t mean a definition for a business model can’t be created to describe a business model. I have spent many years in this area and have developed a definition that works well. It aligns perfectly with the system I have created to make the Business Model Design a reality.
A Business Model is:
An aligned design of the products, processes, people and support functions that enables a business to achieve sustained performance.
My definition encompasses all of the ‘parts of the business model elephant’ listed by the seven responses from my surveys. Some of the survey responses are easily seen in the definition while others exist at a lower level. My goal was to use the fewest words to capture the totality of a business model and I believe I have succeeded. If there are aspects you believe to be missing, such as strategies and goals, trust that they are accommodated in the process but not readily apparent in the definition.
I am a much more visual person than auditory. When I was in a senior executive role my staff would come to me with an idea and I would always say “Show me the picture”. Without the picture I didn’t know if we were on the same page. We unknowingly use the same terms when we are referring to different ideas. Just go back to the seven responses listed above for proof.
With that in mind I have created a visual document to go with the above definition for Business Model. It is my “Show me the picture” of a Business Model but unfortunately I am unable to import it into this document. If you were able to look at it you would see that the diagram illustrates how the business entity exists within the competitive environment and then how each of the components of the business exists within the overall context of the business entity. Context is King and that understanding is embedded into this approach.
The model works regardless of whether the company provides a product or service. And while I use the term ‘business’ I am not referring to only for-profit companies. It is any entity that provides a product or service for someone else. Corporations, single business units, agencies, organizations and even departments can all use this diagram to show its inner workings.
The picture is a high-level view. Each of the parts in the diagram can be decomposed to help the reader better understand the context of what it is they are viewing.
When you study my Business Model Design take notice of the red arrows throughout the diagram. Those arrows indicate a flow. That flow actually represents a progression or sequence which in turn creates dependencies resulting in this document taking on a more three-dimensional perspective.
Look to SlideShare for a PowerPoint by me on this topic. There I wll be able to share my business model design diagram or canvas.
Before closing there is a concept I wish to share with you. “The environment determines the relevance of a design”. This is critical to understand because it can and should be applied in every aspect of a person’s life. My definition of Business Model ends with the words ‘sustained performance’. The only way to achieve that level of performance in anything we do is to constantly adapt to a changing environment. That is true for products, processes and businesses alike. As the expectations change so must the corresponding designs.
There is an entire system that goes with this diagram. And when applied it creates a laser-like focus on what a business needs to do in order to achieve its goals. That brings us full circle to the idea that “It’s all about Performance”.
Customer Focus
This post is actually a response I gave to a blog from the ITtoolbox. The gentleman I was responding to takes the position that companies may believe themselves to be customer focused when in fact they fail to take into consideration what the customer wants. Seems fairly obvious but he is correct. It isn’t unusual for executives to not understand who their customers are and still believe they are customer focused.
But the author of the original post and I quickly diverged when it came to how we see the organization. It is his contention that the organization (especially in those companies that view its employees as their number one asset) should drive the design of the processes. Read on to see how his opinion may contradict his own view of being customer focused.
There is one more point I want to make before you begin reading this blog. I view publicly-held companies, privately-owned businesses, government agencies, non-profit organizations and even departments to be basically the same. Each one of those entities has customers they are serving and processes they are executing. As you read through my response don’t think it does not apply to you if you don’t work in a ‘business’ – these ideas do relate to you.
I agree with your initial premise that a value chain that does not consider the customer is in trouble. How can a company believe it is customer focused if it does not take the time to define and quantify the expectations of the customer and take into consideration what the competition is offering?
How a business is designed will determine whether it is customer focused and plays a huge part in its level of performance. I know this to be true since I am a business architect. I provide customized business design tailored to reach the goals of my customers. In order to do that I have to understand all the components of a business and how they relate to each other.
Business designs have 5 components:
Ø Capstone – all strategic information about the business
o Internal: Vision; Mission; Values; Principles; Goals; Business Strategies, etc.
o External: The competitive environment (trends, obstacles, risks, critical business issues, …). Designs that do not take into consideration the competitive environment are flawed. It is a big mistake to not understand the context in which your business exists. A once robust design can become quickly obsolete if the context (environment) changes. As Joel Barker once said: “When the paradigm shifts everyone starts back at zero.”
Ø Market Model
o Here is where your perspective comes into play. Business leaders need to understand what each market place is looking for from products and services being sold into that market. Leaders must take the time to define the expectations of customers and then quantify them. Vague and arbitrary requirements do not provide good input into product development.
o Here is where we appear to diverge. Business leaders have to understand if their existing Market Model can deliver on the growth goals of the company. The Capstone creates the performance requirements for the Market Model. The performance requirements for the Market Model are not arbitrary.
o If the Market Model is not designed to achieve the growth goals then either the goals need to be adjusted or the design needs to be updated. By having defined and quantified the expectations of the customers it is possible to analyze whether one’s offerings to the market place need to be redesigned. This is being customer focused – you are delivering what the market wants.
Ø Process Model
o Input – Process – Output. Every business has processes to fulfill the demand for its products and services. Those processes do affect how the customer is being served. All of the processes performed by a company are considered to be its Process Model.
o Here is where we definitely differ. The Process Model receives its performance requirements from the Market Model. For instance, if the market place establishes a two week lead time your business will not be competitive with a four week lead time. You will have to reengineer your processes to deliver on the promises made to your customers. This is in keeping with being customer focused.
o Your processes will determine what skills, talents, knowledge and experience you need in your organization. Therefore processes create performance requirements for organizations.
Ø Organizational Model
o Processes are executed by the organization. As mentioned previously the design the Organizational Model receives its performance requirements from the Process Model. If the business needs to outsource some of its work and has never done that before then new skills such as Vendor Management and Service Level Agreements will be need to be executed and either the existing staff will be trained or experienced personnel will be brought in.
o Process designs should factor in the skills of the organization but the company should not under deliver to the market place due to inabilities of the organization. If you under deliver to the market place your sales will suffer accordingly.
o The organization needs to be designed in order to execute the processes that deliver its products/services and achieves the strategic goals of the company. The models are all connected and when designed to support each other the business can actually achieve alignment. Alignment has to be designed into an organization.
Ø Systems Model
o The organization uses systems to execute the processes. Many executives start with systems and work backwards. This is the reason why there are so many dissatisfied business leaders. They are applying a new system to an outdated business design.
o Will changing the dashboard in your car have an effect on the design of your car? Investing in new IT systems before updating the overall business design can only bring marginal improvements.
Designing a business is a cascading process and if you are changing your processes or organization before defining and quantifying the goals of the company and the design of the Market Model then you can not consider your company to be ‘customer focused’ and you can not know if your goals are even achievable.
Eight Steps to Business Excellence
Success will be defined differently for each area of our lives. For some personal success is measured by the size of their bank account while others look to their marriage and children. Professional success may be looked at from how high in the organization you have climbed or it can be the degree of delight received from a job well done.
The eight steps I am going to discuss does not address either directly but if you look closely and think about each one you will find many applications for these steps. This “process” was developed to assist businesses in achieving sustained Business Excellence but its application goes beyond strictly business.
Too many businesses are on the down-side of their growth curve and are facing very difficult times and decisions. Executives at these companies are not in enviable positions. They have an entity that has existed for many years, was successful and is now struggling. Some have been at the helm during the good times and bad while others have been brought in to ‘right the ship’. Regardless the challenge is the same.
As they work with their management team and try to address the situation they will repeatedly ask themselves these four questions:
· “How did we get here?”
· “How could things have gotten this bad?”
· “What could we have done differently”
· “What can we do to get out of this mess?”.
An answer to the first two questions can be found in Tom Peter’s book Re-Imagine. Mr. Peter’s identifies some very interesting facts. In 1917 Forbes magazine first identified the top 100 companies in America. These were the best and the brightest. One could make the argument that these companies had everything they needed to ensure their survival. Fast forward 70 years and 61 of those 100 companies were not to be found.
Next Mr. Peters investigated the performance of companies listed in the S&P 500. Again these are top companies with money and people to drive their businesses forward. The span of time is now from 1957 to 1997, so the window of change has been reduced by 30 years. Here we are shown that 426 of the 500 S&P companies ceased to exist.
From 1917 to 1987 – 60% of top companies did not make it. From 1957 – 1997 81% of the largest companies no longer existed. The percentage and speed of becoming obsolete is increasing. But what causes companies to become obsolete?
It would be interesting to establish a correlation between the rate of change in the world around us and the rate of obsolescence in business. Who doesn’t say things are happening faster and faster – that the merry-go-round of life isn’t speeding up? While a part of us yearns for the good old days at the same time we want our HD TV and Blue ray technology. As the world turns faster and the globe becomes smaller, customer expectations change more rapidly and businesses are challenged to keep up.
The relevance of any business and the products/services it offers to the market place is determined by the world external to it. I refer to the external world as the competitive environment. Businesses don’t get to decide how relevant they are, instead it is the competitive environment that determines the relevancy of a business. Each business, its suppliers, business partners, competitors, customers, distributors, sales, …are all within a competitive environment. The environment provides the context in which to evaluate the relevance of the design of every business and its products/services.
So in response to the questions:
· “How did we get here?”
· “How could things have gotten this bad?”
Answer is:
· Your business became obsolete due to a changing environment.
And that leads to the next two questions: “What could we have done differently?” and “What can we do to get out of this mess?”.
Just as the first two questions had a single answer so do the second set of questions. Allow me to develop this idea by returning to the ideas of environment and Context.
Businesses are created in the environment in which they are going to compete. As a business takes off its products/services are designed to meet the needs of the customer – otherwise the customer would not buy them and the business would fail to exist. Along the way the business grows and adds new functions and internal services to support the increasing demand for its products/services and the operations to fulfill that demand. All this is happening in the original environment.
Over time that environment will change. Customers will expect new levels of quality, service and options; competitors will offer new and improved products; new materials will become available; new suppliers will arrive on the scene; trade barriers will be erected or torn down,…. and your business, which was designed to compete in the old environment becomes less and less relevant.
Here I introduce the idea that businesses have a design just like products or services. That may be hard to conceive since you have never seen a set of Business Blueprints™. It is hard to visualize something that you have not seen but that does not mean it does not exist.
Sadly, Dr. Michael Hammer passed away recently. For those of you who are not familiar with his writings, he made popular the idea of reengineering processes to improve business performance. When his first book came out in the early 1990’s I had already been doing process design work for years but did not have a name for what I was doing. I just thought of it as solving problems at the root cause level.
Dr. Hammer came along and was able to have people understand that a set of activities used to accomplish a purpose could be defined as a process and that the design of any process has the largest impact on how well work is performed. By documenting every activity and placing those activities side-by-side the process design becomes visible, enabling you to analyze and subsequently intelligently reengineer that design to meet performance goals.
Understanding process design remains important in business today. BPR, Lean Six Sigma, Kaizan, Total Quality,… are all extensions of this concept. Many consultants are referring to business processes when they speak about business models (processes are only one perspective of a business design). Executives are looking for ways to improve the performance of their businesses and actively seek it through process reengineering.
All designs become obsolete.
Earlier I spoke about businesses becoming obsolete – the same thing happens at the process level for all the same reasons. Thanks to people like Dr. Michael Hammer and Mr. Derril Watts with Mountain Home Training and Consulting, http://www.mhc-net.com/, people have come to understand that just because you can’t see processes does not mean they don’t exist and that they don’t have a design. It took years for this concept to work its way into most businesses and I would argue that any business that does not have Process Management as one of its disciplines is lacking as a professional organization.
As process designs are invisible until they are documented so are business designs. The impact that designs have on process performance is even more powerful at the business/organization level.
Design Dictates Performance.
So in response to the questions:
· “What could we have done differently?”
· “What can we do to get out of this mess?”
Answer is:
· Design your business to compete in today’s environment.
If you are part of a business or organization and wondering what you should have done or what you can do to get out of your current dilemma it comes down to executing these Eight Steps to Business Excellence.
- Document the existing business design
· When a business is not meeting performance expectations you can not know whether it is a design or execution problem if the design can not be seen.
· More than 80% of the time an obsolete design is the root cause of performance issues.
- Establish the performance goals you wish to achieve
· Every company has growth and profit goals.
· Business designs must support business goals.
· Setting goals that are not attainable with the existing design is harmful.
· Unrealistic goals are a waste of money and represent lost opportunities.
- Establish the strategies you want to execute
· How will the strategic goals be reached given the environment and company’s organization?
· How you will accomplish something is deciding what strategies you wish to execute.
- Analyze the design of your business model in light of your goals and strategies
· Just because a goal is set does not mean it can be reached.
· Can you execute your strategies given the constraints of your design?
· If a design can not be seen it how can it be analyzed?
- Update the design to achieve goals and execute strategies
· The words design and strategy are not interchangeable.
· Changing a strategy has absolutely no impact on the design of a business.
· Designs determine what strategies can be executed.
- Create Strategic Plan and Master Project Plan
· A Business Strategic Plan:
o Strategic goals
o Analysis of the changing environment and the impact to business
o Clearly identified strategies and a description of each one
o All strategic initiatives and the rationale behind each one.
· A Master Project Plan is the ‘road map’ all executives want to see:
o Initiatives, dependencies and the sequence of projects
o Project prioritization no longer exists
o All initiatives from the Strategic Plan are in the Master Project
Plan.
- Implement the new design
· A Master Project Plan is the ‘road map’ all executives
· The design has to be in place in order for strategies to be executed.
· The Master Project Plan shows how to implement the new business design.
· To receive the full benefit of a new design it must be completely implemented.
- Execute the strategies
· The entire design does not have to be in place before management starts to see positive results.
· Some strategies can be executed with the existing design while others can be executed after particular initiatives are completed.
Stan Kirkwood - Business Designer 