Do You Really Understand What Your Business Model Is?

It may not be what you think.

Vivek Wadhwa, entrepreneur turned academic writes in one of his blogs:

"Everyone talks about business models. But I’ll bet that if you quizzed a random sample of these people, you’d find that they really don’t know what a business model is."

I couldn’t agree more. In essence the technology-driven transformation in today’s business environment puts a premium on the model we adopt. Not only are entirely new business models possible, they are also necessary for survival. And they must be so designed that they can morph into something new on the fly when the environment changes. A lesson being learned by far too many organizations, and a little too late, today.

How NOT to Define a Business Model

"Business model" is one of those terms that takes on the meaning of its user, and we should begin with a clear understanding of what it is and isn’t. We can’t always be sure that one person’s "business model" isn’t another’s "value proposition," "business case," "revenue model," "strategy," and so on. Before explaining what I think the term ought to mean, let me point out a few of the ways people use it that have little bearing on reality:

The Cocktail Napkin One-Liner – The first way that "business model" is used mistakenly is when people associate it with a convenient one-liner about what a company does. The proverbial business idea scribbled on a cocktail napkin, for example, falls squarely into this camp. Although this gross simplification is too shallow, it does, perhaps inadvertently, echo one of the crucial attributes of a proper business model: It represents a big picture of the business.

The Financial Model in Disguise – Ironically, the second way that people misapply the term is almost exactly the opposite of the cocktail napkin mistake: Rather than oversimplify to the point of jingoism, they dive in at a level of complexity that precludes a big-picture view. This happens when a business model is equated with a financial model.

Before we can build even the most basic financial model, we have to first make some important assumptions (which industry to compete in, who the customers are, etc.) that preclude the unbiased, big picture that is integral to our purposes. When I use the term "business model," I mean something different from both the cocktail napkin one-liner and the financial model in disguise. In my view, a business model is a big picture that captures a snapshot of the enterprise and communicates direction and goals to all stakeholders.

A Business Model is a Business Blueprint

In fact, I’m going to define business model as the "business blueprint" or "business architecture." This will allow me to break it down into its components in a way that makes it an operational definition. Of course the term blueprint or architecture can mean different things to different people as well, so let me narrow it down.

Architecture isn’t Just Technology. Some people assume that architecture describes only systems or technology assets. By ignoring "business architecture" altogether, this misconception encourages companies to develop a road map that perhaps focuses on technology innovation—but with no direct connection to business and process.

Architecture isn’t Just Processes. Others make the mistake of interpreting business architecture to mean just the business processes that the company performs. This ignores the big-picture view of the business, and makes it difficult for decision-makers to determine not just what processes exist, but also why these processes are executed the way that they are.

Key Elements of a Business Blueprint

Perhaps the best way to visualize what a business blueprint is and how it adds value to the firm would be to show the types of information it might include. Typically, it classifies elements into four broad areas:

The overall Identity of the enterprise – This might include such elements as brands, the corporate mission, and the reputation of the organization in the marketplace, the target market, and general differentiators for the enterprise. It might also include elements that describe the organization’s unique culture, such as values, office rules, and behavioral expectations.

The strategy for the enterprise – Elements in this category could describe how the organization translates its mission and values into concrete action. An important component of this role might be the ability to coordinate between multiple business units, each of which presumably needs to play a unique role to help meet common, strategic goals. Strategy might include elements like goals, a timeframe for achieving those goals, the resources that are required, and custom performance indicators.

The internal assets that help the enterprise to achieve its strategic goals – This could include all of the resources that the organization might muster to pursue its strategy. These might be products and services; organizational assets, including the reporting structure, geographic distribution, roles/responsibilities, and individual resources; financial resources; intellectual property; distribution channels; and physical assets like real estate, operational and information technology, and so on.

The external environment in which the enterprise competes – This would include customers, suppliers, partners, and competitors. In addition, it could include demographics for the market and industry; potential entrants; information about compliance; emerging technologies; the external availability of technology resources, and general trends that influence the company’s position in its market.

Each of these elements has subjective and objective—or, textual and numeric—attributes (metrics, priority, and feasibility, for example) that help give the business blueprint the depth of description and interaction that distinguish it from a simple diagram or drawing.

For example, the element "high value customer" could include attributes such as a textual description of who is considered a high-value customer and numerical values that describe the estimated number of customers that fall into this category and the revenue a customer needs to account for to qualify as high-value.

This information provides an important basis for developing various business scenarios. Scenarios could vary according to the revenue required to qualify as a high-value customer.

Know Thyself

"Know thyself," the ancients instruct us. Building on that, Shakespeare wrote, "To thine own self be true." This for an enterprise is the essence of a business blueprint.

Each organization’s culture will inevitably produce a unique approach, none of which is necessarily better or worse than any other. One of the first things we notice about successful organization is that they have a mission, an identity, a personality, a story to tell about what they are and what they are trying to achieve. This, not one of those abstract "mission statements" framed and hung here and there in the halls. Rather, this is a clear understanding and articulation of the reason the organization exists.

Most mature enterprises have used a variety of internal and external resources to document bits and pieces of the way they operate over time—organization charts, business plans, statements of policies and procedures, and the like. Many of these documents are of little value. They do not use commonly agreed-upon standards and terminology, and are only partially complete. Therefore, they cannot be logically connected to formulate a cohesive picture.

This is obviously not a matter for a two-day meeting or a week-long offsite. Nor is it the province of some ad hoc committee. It is a matter for everyone, and because the world doesn’t sit still it is a continuous activity.

Related

Why You Need a Better Business Blueprint
3 Leadership Mandates For Sustained Innovation & Growth
Creating a Company Designed for the Long Haul

[Image: Flickr user Garreth Wilcock]

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4 Comments

  • Wayne Stange

    This is not news - Accenture has been developing and taking a "business blueprint" approach for decades and has developed deep collateral around the approach. Often biggest challenge is to convince the client of the benefits of the approach... (I am not an Accenture employee...)

  • Dicknjudy

    This write-up was very good and captured many of the key elements.  I like the idea of a blueprint.  The trouble is, not very many people have the depth of training and experience to really understand the magnitude of the many issues facing them as they proceed to develop a business model.  Colleges certainly do not teach nor do they prepare their graduates for the "real" world. 

    By the way, one of the critical elements of the model is to establish a solid foundation, as without one, the business will collapse.  Perceived market research for ones product or service will give you confidence in the size of your projected market and that is essential when you develop the financial profit model.

  • Elizabeth M. Lane

    like Edward responded I'm surprised that any one can make $9965 in 1 month on the computer. have you read this page w­w­w.K­E­P­2.c­o­m