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”.

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.