What is a Business Model?

Before you can appreciate why business model definition is a crucial activity for BTM, it helps to have a solid understanding of what I mean by a business model. This is especially true since the term is frequently used to describe things that are dramatically different than what I mean in this specific context.

Misconceptions About Business Models

Over time, a business model has come to mean very different things depending on whom you ask. So while you're likely to hear academics , professionals, and journalists use the term both frequently and familiarly, you 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 the term means, let me mention two uses that are not related to BTM:

- The Cocktail Napkin One-Liner: The first way that "business model" is used mistakenly is when people ”journalists, for example ”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 to form an effective basis for business/technology alignment, it does, perhaps inadvertently, echo one of the crucial attributes of a business model in BTM: 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 grossly oversimplifying the term, 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 you can build even the most basic financial model, you 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 the business model in BTM.

In the context of BTM, the term business model means something different from both the cocktail napkin one-liner and the financial model in disguise. In our discussion, a business model represents a big picture that captures a snapshot of the enterprise and communicates direction and goals to other stakeholders.

Seeing How the Pieces Fit

"I'm not sure that many executives truly understand what we mean when we say 'business model.' It means more than just the way you operate . Having a strong business model means that you have thought through the way you service the customer, the way you make money, the way you go to market ”all these elements and how they fit together.

For many companies, the planning process is still very financially driven instead of being focused on the business model; they tend to take a look at financial performance, projections, and plans, and then try to engineer future financial plans, all within the construct of their current business model. Not many established companies will assess their entire business models in a proactive way ”dotcoms will do it because the market has crushed their old business models, but Global 2000 companies tend to start by examining their financial models and not rethinking their business models.

Often in existing companies that have been established for some time, the managers today are typically not the original architects of the current business model. Thus, they may not really understand their own business model or have ever thought about why it's constructed the way it is.

When we in corporate America go through our planning processes, do we really sit back and think through the kind of business we are, how it's put together, and then how to improve it going forward? Too many of us move right into the financial part of the planning process and let that drive everything, as opposed to really rethinking the business model. Without that thorough assessment and by focusing just on financial plans, you tend to find only incremental improvement as opposed to breakthrough insights about the business model. Not every company needs to dramatically change its business model frequently ”that's unnecessary. But you should examine your company's business model regularly and determine your true strengths and weaknesses. Having a well-designed planning process forces your current business leaders and the new generation of leaders coming up to really grapple with these issues and think about how to improve the business every year."

” Randolph C. Blazer, chairman & CEO, KMPG Consulting, Inc.

What a Business Model Should Be

The best way to visualize how business models add value to BTM is to show ”rather than tell ”the type of information that an example business model might include. Figure 5.1 presents an example business model that classifies elements into four broad areas:

- The overall identity of the firm: The firm's identity might include elements such as brands, the corporate mission, the reputation of the firm in the marketplace , the target market, and general differentiators for the firm. It might also include elements that describe the company's unique culture such as values, office rules, and behavioral expectations.

- The strategy for the firm: Elements in this category could describe how the firm 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 such as goals, a timeframe for achieving those goals, the resources that are required, and custom performance indicators.

- The internal assets that help the firm to achieve its strategic goals: Internal assets could include all of the resources that the example firm might muster to pursue its strategy. This might include things like 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 such as real estate and machinery.

- The external business environment in which the firm competes: Finally, the example business model might also include a category of elements that describes the firm's external business environment, including customers, suppliers, partners , and competitors . In addition, the external environment could include demographics for the market and industry; potential entrants; information about compliance; and general trends that influence the company's position in their market.

Figure 5.1. An example business model that includes four general categories of elements ”overall identify, strategy, external business environment, and internal assets

Each of these elements maintains textual and numeric attributes (such as metrics, priority, and feasibility) that help give the model the depth of description and interaction that distinguishes it from a simple diagram or drawing. For example, the element labeled "High Value" in Fig. 5.1 could include attributes such as a textual description of who is considered a high-value customer; numerical values that describe the estimated number of customers that fall into this category; and the revenue a customer needs to generate for the company to qualify as a high-value customer. This information provides an important basis for analyzing the model (while managing the portfolio of IT investments that Ch. 8 discusses, for example) and for developing business scenario models. (Different scenarios, for example, could vary according to the revenue required to qualify as a high-value customer.)

Figure 5.1 provides some idea about the type of information that's captured in a business model. But remember, explaining business models by example poses somewhat of a problem. Although it explicitly differentiates a business model from misconceptions like the cocktail napkin one-liner or the financial model in disguise, BTM doesn't limit companies to one empirically correct set of elements to make up the model. So while the categories and elements expressed in Fig. 5.1 provide a pretty good example, they shouldn't be considered a cookie- cutter mold after which every business model should be patterned ; each company's unique culture will inevitably produce a unique approach to business modeling, none of which are necessarily "better" ”or " worse " for that matter ”than any other.

What Varies Within Business Models

Different approaches to business model definition produce specific elements and attributes that are unique to particular companies, business units, or even individual projects. In addition to these differences in content, there are two primary ways in which business models that are developed for BTM differ :

- The methodology that is used to define the model

- The scale at which the model is developed

Methodology

The first area where business models frequently vary is in the methodology that companies follow to define them. To be effective, the business model must reflect the perspectives, personalities, and priorities that make each company and project unique. This is why there's no one "right" set of elements that defines a business model; anyone who implies that there is underestimates how different companies ”and even business units within companies ”really are.

In keeping with this spirit of flexibility, this book's discussion of business model definition ”and process optimization and technology automation for that matter ”doesn't introduce an exact methodology; what works well for Company A's IT project won't always work for Companies B and C. In fact, the unique way that a company goes about defining its business model can be an important source of competitive advantage. But whichever methodology is used should be accessible and familiar to the widest possible audience, so that even non-experts can pick up the business model, understand it, and eventually contribute to it themselves .

Scale

The second area where business models vary is in scale. The scale for a mom-and-pop convenience store is obvious: one store, one business model. But in more complex business environments, the scale at which the business should be viewed isn't always clear-cut . If, for example, you're an IT professional at a huge multinational corporation, is it feasible for you to develop a business model that describes the entire company? Should each line of business have its own model? Or should each business model describe smaller entities like divisions or groups?

The answer to each of these questions is "Yes." Business models can be developed to whatever scale the modelers need to analyze at any given time, from a complete picture of a Fortune 500 conglomerate all the way down to a group of regional salespeople. The purpose that the business model serves, of course, varies according to the model's scale. For example, an enterprise-wide business model can help to break down organizational silos and unify planning across the whole enterprise. A business model scaled to a particular group of employees , on the other hand, can help decision- makers to think through details about how that group functions in order to design IT systems that meet their specific needs.

The way that business models vary according to scale is roughly analogous to strategy ”which similarly can be decomposed at any level of the enterprise. The strategy for an individual business unit, for example, might include determining which new products to introduce, how to market them, and so on, while strategy at the corporate level would concentrate on general product lines, markets, and the long-term future direction of the enterprise.