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.

1. A business model is a process ….
2. Business model is the technical design …
3. A business model is a description ….
4. Rules and goals of the business as a whole.
5. The method of running the business …
6. A plan …..
7. 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”.

Businesses do not Exist

I am not certain if it is a matter of being lazy or if it is nature’s way of not burdening us with too much detail but regardless of the reason people do not ‘think’ correctly about governments, religions, races or businesses.   Our thinking falls down when referring to any group or entity as if is one thing.

We often hear about how inefficient “the government” is in the US.  “The government can not run anything” or “the military and intelligence should not be used in the same sentence”.  What we are failing to realize is the government is not one thing  – it is many.  The military (while being protrayed as having some questionable purchasing practices) is composed of many brilliant people.  The military is many.

And when we speak about business we should remember that it is not just one thing.  I spent seven years in the role of CIO.  One of the challenges facing CIOs centers on the idea of aligning IT with ‘the business’.  And here is when I learned that ‘the business’ does not exist.  The business is a collection of disparate groups, all sharing a common banner, but operating relatively independently of each other.  Each have their own metrics, own goals, objectives, and key performance indicators.   Each being led by a person wishing to have a World Class organization. 

Essentially each department is a business within a business.  I witnessed it first hand when I sat in on the assessment of the alignment of an IT department with the rest of the business.  The findings were not in favor of the IT department.  The consulting company determined that more than 80% of the IT projects did not support the key drivers for the business.  The consulting company therefore determined the IT department was not aligned with the business.  Just how wrong the consulting company was became apparent when it was discovered that every one of those projects originated outside of IT.  Those projects came from ‘the business’.

What you have is the situation where ‘the business is not aligned with the business’.  Actually there is no such thing as ‘the business’.  ‘The business’ was never designed as an entity but instead it evolved one decision at a time and just happens to look the way it looks.

This is the primary achilles heel for every business – business executives do not understand that the business they are leading actually has a design and  that design is as tangible as the design of their products or processes.  Nor do they understand that the design of a business has the greatest impact on the performance of ‘the business’.

Wouldn’t you like to see what your business design looks like?  Wouldn’t you like to be able to analyze the performance capabilities of your design and make any necessary changes to improve its performance? 

If you took the time to have your business designed – then your business would actually exist.  Without the design your business is really just a bunch of departments acting mostly independently.  Good luck with that.

Beyond Strategy

I have essentially made a career out of being able to dig down and uncover the root cause of problems.  For many years I served at the request of the CFO of a large consumer goods corporation.  He would crunch the numbers, do some analysis and then say “Go down to the plant at Dayton, Tennessee and see what is happening in the warehouse – invoices are arriving to dealers before the product does.”  And off I would go, dig through all the issues, discover the real source of the problem and develop solutions on how to fix the problem.  The CFO would pick from the choices I had offered up and then I would lead the charge to make changes.  It was a great deal of fun.

 

But there were two itches that could not be scratched in the role that I had.  One, often times the solutions I developed were only partially implemented.  I would create what I felt was a great design but reservations of local management would prevent them from fully implementing my solution.  And though improvements were gained, they often fell short of what they could have been.  I wanted to have control of an organization where I could design, implement and then execute. 

 

The other itch was wanting to participate in the setting of direction for the corporation.  One of my inherent strengths is the ability to think strategically.  I wanted to be in the Board Room when direction was being set and strategies were being developed. 

 

In order to gain access to that august group I had to take on the role of an executive so when I was offered the CIO position I took it.  I believed I would now have control over an entire department and could mold it in the image I felt would best serve the corporation.  And I would participate in strategy sessions. 

 

Indeed I did get to shape the IT department but there were constraints placed on me by the CEO.  This is to be expected.  This one form of governance for the IT department.   

 

And I became disenchanted with strategic planning.  If every company goes through a planning process then why do so many companies underperform?  What is it about the planning process that is not working? 

 

Turns out it has to do with design.  A strategy can only be executed if a design can accommodate it.  Executives fail to realize that their business has a design and therefore ignore it or think that changing strategies has an effect on business design.  It does not.  To improve the performance of a business you have to go beyond strategy!  You must look to the business design for success.

General Conversation

I joined two groups on LinkedIn – one for general business opportunities and one for executives.  Since most of the entries in both groups are advertisements for services I decided to use it to spread the word about the value design plays in the success of any company.  I did receive two responses from one thoughtful gentleman and have decided to publish our dialogue.  My comments are in black and his are in blue.

 

This Post will be used to share questions that are posed to me and my responses to them.

 

 

Beyond Strategy! The closest thing to a Silver Bullet in improving performance is Business Blueprints.

 

Strategy alone can not take you where you need to go. The design of each business must factor in the goals it has set and the strategies it wishes to execute. Goals that can not be reached and strategies that can not be executed are harmful to the entire organization.

 

Design is the key to success, not strategy. 80% of performance problems can be tied directly back to a poor design. This is true with businesses, processes and products. Go to my website at http://www.stankirkwood.com and see the top 10 common Business Pain Points that can be addressed with a set of Business Blueprints™. You can also request a presentation of the system we created to address business design issues at http://www.businessdesignconcepts.com.

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Plan you work and work your plan!

 

 

Business Design is much more than creating a plan and then executing that plan. Probably every large business that has failed had annual (business) plans as well as strategic plans.

 

The progression is: establish goals and identify desired strategies; design markets to support those goals; design processes to support the markets; design an organization to execute the processes, and design systems to support all of the above. The overall design must be able to execute the desired strategies. Then you create the implementation plan and execute the implementation plan. After the design is implemented it must be executed. An execution plan must be created and executed.

 

 

 

 

 

In theory I agree, however I’ve been associated with too many businesses that can’t get out of their own way due to the weight of the planning process. And that process allows too many to forge their own agendas, diluting the resources to simply move from “A to B”.

 

I sat in too many senior management planning sessions just mumbling on how we were able to make the simple overly complicated. And generally, once a process document was crafted, the senior most managers went on their way, comfortable in knowing their job was done! Never did it occur to them that outside of making sure their board meetings notes were put in lock step with the plan, did they ever think they actually had to work that plan themselves! That’s why most major companies fail miserably when it comes to a plan.

 

 

I was cleaning up some emails and reread your message to me.  You hit on several problems in your response:  1) the weight of a planning process; 2) covert agendas; 3) making the simple complex, and 4) lack of commitment or understanding on the part of senior management on their role in the implementation of a plan.

 

Each one of those issues does cause problems in many companies today.  If a company were to go through the Business Blueprinting™ process the first three issues would be immediately addressed.  The process itself is intentionally designed to deliver maximum impact with minimal effort required by the senior management team.  The entire process of documenting the design of a company, analyzing that design to determine whether the company’s goals can be achieved and strategies executed and then redesigning the business to ensure success only takes eight days of our clients’ time.  It takes us 8 – 10 weeks, but only eight days for our clients. 

 

During the gathering of company and competitive environment information agendas become apparent.  Why?  Because our goal is “Total Business Performance”.  We are looking for what is necessary for the business as a whole to be successful.  As Dr. Farson suggested:  “Leaders have to become designers and designers need to become leaders”.  In actually we do the design with the input from the leaders.  Our design is actually a recommendation which the leaders need to agree upon.  It is exactly the same role an architect has in designing a house.  S/he would gather important information from the prospective home builder and then design a house to meet those requirements. 

 

We do the same in business – which leads to your third point about complexity.  Businesses are complex.  The challenge is to simplify them as much as possible and we are able to do that.  Basically all businesses are the same.  Certainly their products and services vary and how they do their work varies but the foundation is the same.  For instance every business must create demand for its products and services (unless you enjoy being a monopoly or government agency).  And every business must fulfill the demand for its products and services.  We have created a common framework, common structure, common DNA, and common metrics for all businesses.  We simplify the complex.

 

Another way we help address complexity is by documenting the design of the business.  Five people can use the same word and have a different understanding of its meaning.  By putting a picture in front of executives it brings them together and they share a common understanding.  Those meeting rooms you spoke about are often like the Tower of Babel and they don’t even know it.  We give them the common language of pictures.

 

Lastly, we do our best to involve the senior management team by delivering not only an updated business design but also a strategic plan, master project plan and a governance model to keep the design current (Strategic Management).  The master project plan is a very strong reminder that their responsibility is not over when the meeting ends.  If the CEO will take ownership of the master project plan (does not need to manage it but does need to own it) then the issue you surfaced is greatly diminished.

Invalid Business Assumptions

Each person goes through the day making assumptions.  We assume the sun will rise in the east; the light will turn on in the bathroom; the shower will have hot water; the car will start when we leave for work and our computer will connect to the internet.  The number of assumptions we make every day as we walk through our lives must add up into the hundreds.  We are blind to them because events unfolding in front of us do not challenge our assumptions but instead support them.  Unknowingly to us most of our assumptions are strengthened every day. 

 

Perhaps assumptions are mental habits or conditioning and serve a similar purpose to learning how to tie shoes.  When we first learn to tie a shoe it requires considerable attention or intentionality.  We think about each move and either verbally or mentally repeat the instructions.  It is a very manual and slow process.  As we learn to tie our shoes we create ‘moving memory’.  The more we practice the less attention is required and the faster and smoother we become.  After the memory is completely programmed within us there is no benefit to keep thinking about each movement.  Movement without thought can be a good thing.  Ask any athlete about thinking too much when playing a sport.  Just let your body do what it does and it will perform well.

 

Assumptions are often referred to as something bad.  Many times I have heard the phrase:  “You know what happens when you assume something?  Makes an ass out of u and me”.  So what would our lives be like if we didn’t make any assumptions?  What if we thought through every situation and condition before making a decision or taking a step?  If making assumptions is a bad thing then it follows that not making assumptions is a good thing.   

 

We have all had an experience where we made an assumption that led to an unexpected and negative incident.  In those situations we vow to never assume anything again because it can sneak up and bite us.  Is that vow realistic or even desirable?   

 

Why do we make assumptions?  To relieve ourselves of the active thinking about events that almost always occur based upon our experiences.  We don’t waste our time thinking about whether the sun will rise.  We don’t think about how our bodies will digest the food we have for lunch.  We don’t think about many things going on around us.

 

So from one perspective assumptions are time savers.  That is until the assumption does not work in our favor.  It is similar to the noise the refrigerator makes when it is running – you don’t notice it until it stops.  We don’t see our assumptions until things do not go according to plan.  Then we look for what we missed and try to see how it could have gone differently.  Quite often we discover an action we overlooked but did not recognize because we made an invalid assumption.

 

This is especially true in business.  Decisions based upon invalid assumptions can lead to disastrous results but we are blind to the assumptions until the results are coming in.  And then it can be too late. 

 

Imagine the value of a list of common invalid business assumptions that lead to poor performance.  By knowing the assumptions you can avoid making them.  Stay blind and you are doomed to repeat them over and over again. 

 

During the past four years my business partner and I have been compiling such a list and have found them to fall into four categories.  For the sake of brevity I have only included one invalid assumption in each category along with a description of the assumption.  I have three more invalid assumptions for each category listed in a lengthier document.  If you wish a copy of that document  contact me through this blog or directly reach me at skirkwood@gmail.com. 

 

The first category of invalid business assumptions executives make are about the Goals they develop.  These are important assumptions because the goals of a business establish the performance requirements for the entire enterprise.  For instance if a corporate sales goal is to increase revenue by a certain dollar amount then the year will be considered successful only if the business performs at that level.  Anything less is unsatifactory.  Goals and performance requirements are the same thing.

·        All Goals are Achievable.

o       Just because you set a goal does not mean you can achieve it.  Businesses are challenged to set “Big, Hairy, Audacious, Goals” (BHAGs) but if those goals are not achievable then setting and working on the goals is actually harmful.  There is nothing wrong with setting stretch goals but they need to be attainable.  If it is impossible for your business to grow a certain percentage with your existing Business Model – there are five discretely defined components to a Business Model – then you have to either change the goal or redesign your business to be able to achieve that goal.  If you are not designed to achieve the goal then no matter how hard you work or push your people you will not reach the goal.

·        Invalid Goal assumption 2

·        Invalid Goal assumption 3

·        Invalid Goal assumption 4

 

The second category of invalid business assumptions made by executives concern the Design of their business.  There seems to be an intuitive understanding that businesses have a design because the term Business Model is used frequently by CEOs.  A model is the physical manifestation of a design.  When a product is prototyped the designer creates a set of blueprints (designs) that are used to build the model.  The next time a CEO speaks about his/her business model ask him/her to show you the design.  And since the CEO’s understanding of the business design is so vague it is easy to have invalid assumptions about it.  Here is one.

·        Improving Information will Improve the Design of the Business

o       Many executives look to IT systems to solve their problems.  With better information they will be positioned to make more intelligent and timely decisions.  Executives need to remember that systems support organizations / organizations execute processes / processes create products or services / products or services are delivered to customers.  Systems are the last thing executives should be looking to change!  Will replacing the dashboard (information system) in your car change its performance capabilities?  No.  The root cause problem in your business is seldom the result of any IT system.  The fault usually lies in the design of the business.

·        Invalid Design assumption 2

·        Invalid Design assumption 3

·        Invalid Design assumption 4

 

The third category of invalid business assumptions deals with Strategies.  This is an activity that nearly executive has engaged in and can relate to.  It is the source of out-of-the-box thinking and it sets the direction of the corporation for years to come.  Strategic planning is considered essential for the survival of every company because executives know that to be stagnant is to die.  They have to change and the vehicle for change is thought to be strategies.  And if this is indeed the vehicle (which we know it is not) then any invalid assumption in this group can be crippling.  Here is the first invalid business assumption in this group:

·        Strategies are Strategies

o       Not all strategies are created equal.  There are at least three types of strategies:  design strategies, implementation strategies and execution strategies.  The nature of each type of strategy is very different as well as their timing.  Business executives often confuse a design strategy with the design of the business.  They are two completely different ideas and need to be kept separate in order to reduce confusion.  Know the difference between design and strategy.

·        Invalid Strategy assumption 2

·        Invalid Strategy assumption 3

·        Invalid Strategy assumption 4

 

The fourth group of invalid business assumptions is about Performance.  Performance is important for the health of the organization.  If there is substandard performance from the customer’s perspective then sales will suffer and the business will fail.  Customers are looking for companies that can offer the greatest Value Proposition.  If there are performance issues as it relates to the return on investment then stockholders will opt to invest their monies in better performing businesses.  Shareholders are looking to create personal wealth and companies that are not financially successful suffer in the market place and that has a negative impact on the company’s stock price.  Actual Performance is very important in the long-term prospects of any company.

·        Performance Problems are Always Execution Problems

o       Business executives are aware of the impact that the quality of a  design has on the performance of the product but they fail to apply that understanding to their business.  80% of the time the quality and relevance of the business design is at the root of performance problems.  A poor design can never result in good performance.  But since executives are unaware of business design they see execution as the culprit.  Execution is particularly attractive to management since those problems are the fault of the employees while the quality of the design is management’s responsibility.

·        Invalid Performance assumption 2

·        Invalid Performance assumption 3

·        Invalid Performance assumption 4

 

Knowing that you are operating under an invalid assumption may give you the chance to change your decision making.  If you are making assumptions about things that you can control then you do have the option to make changes.  If your assumptions are about large external events such as the economy, then you can not control the outcome but you can develop scenarios.