Five Aspects of Business Model

The business model is a living breathing thing.

From Wikipedia: A business model describes the rationale of how an organization creates, delivers, and captures value (economic, social, cultural, or other forms of value). Whenever a business is established, it either explicitly or implicitly employs a particular business model that describes the architecture of the value creation, delivery, and capture mechanisms employed by the business enterprise. The essence of a business model is that it defines the manner by which the business enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit: it thus reflects management’s hypothesis about what customers want, how they want it, and how an enterprise can organize to best meet those needs, get paid for doing so, and make a profit.

At a conceptual level, a business model includes all aspects of a company’s approach to developing a profitable offering and delivering it to its target customers. A review of the relevant literature reveals that more than 40 different components — such as target customer, type of offering and pricing approach — have been included in various definitions of business models put forward over the past few decades, with much of the variation stemming from differences between the industries and circumstances in which a definition has been applied.

A Set of Questions to Explore Business Model:

Businesses may explore the concept of a business model by addressing several core questions that the majority of business model researchers deal with their models:
•Who is the target customer?
•What need is met for the customer?
•What offer will we provide to address that need?
•How does the customer gain access to that offering?
•What role will our business play in providing the offering?
•How will our business earn a profit?

In any working business model, the answers to these questions are fixed. But what if they weren’t? What if you considered each of them as a variable? What new opportunities could you capture that you can’t address with your current business model? The answers to these questions form the essence of business model experimentation.

• Why Business Model Matters

1) Some organizations require the calculation of a return on investment (ROI)
2). Some organizations prepare a budget
3). Some organizations require the benchmarking study

1.    Characteristics of a Real Business Model

A real business model is an analytical model that lists all of the sources of value, cost, and risk, and contains formulas to interconnect them. The essence of a business model is some source of value that represents a competitive advantage.

The important point is that there is a real model behind the narrative summary of the model, a real-world business model is analytical; it generates predictions for how much money one will make. As such, it contains numeric values representing one's assumptions about the market, about costs, etc. This is important because these assumptions can then be measured through market research. But when they say they want the model, they are asking for the summary of the model.

A business model covers 100% of the business. An enterprise may have more than one business, as most moderate size enterprises have more than one business, and therefore more than one business model.

2. Business Model, Business Strategy and Business Architecture

• A business model is NOT as same as a strategy: A business model describes what a business will do to make money. A strategy describes how a group of people should change their behavior to help either improve the ability of the business to perform as its model predicts or to change the model to behave differently. 

• A business model is a description of the way in which an enterprise intends to make money: It is not a strategy. It is an entire frame of elements that describe the intents and constraints of a business or organization. In contrast, a business strategy is conceptual and usually consists of a set of choices about what to do. It is often supported by an analytical model (a business model for that strategy). Business models are usually quantitative. People want to see how things add up. That is the difference between a business "model" and a business "strategy

         

• They Go Hand in Hand and are often confused: In most US for-profit corporations, the mission is to make money for shareholders, though there're debates going on whether it's also a reason to cause many businesses to fail. The mission is their reason for being a business. The business model is how they plan to do that. Actually, the way they plan to make money is the strategy (for making money). The model is the analytical model for how the strategy will work. The two go hand in hand and are often confused.

Today, “business model” and “strategy” are among the most sloppily used terms in business; they are often stretched to mean everything—and end up meaning nothing. Business models describe, as a system, how the pieces of a business fit together. But they don’t factor in one critical dimension of performance: competition. Sooner or later—and it is usually sooner—every enterprise runs into competitors. Dealing with that reality is a strategy’s job (from Why Business Models Matter)

Business Model is a Simulation of Different Strategy Scenario: A strategy is an architecture for change. A real strategy is a complex scenario, and it is supported by a model - an analytical model. There is a process of considering different strategy scenarios. Each scenario is backed by an analytical model. The strategy scenarios are then compared based on their expected value. This is often simulated nowadays. The business model is then the simulation: it is a numerical discrete event simulation.

A strategy is a decision or approach for realizing the organization's goals. The organization will develop a set of strategies as part of its strategic planning. The decisions are part of the strategy. The model merely evaluates the strategy in an analytical and quantitative term.

• A Business Model is inter-related with Strategy:

A Business Model is operational in nature and structural (What exists).
A Business Model is therefore related to a Business Strategy in time – Current/Target or Current /transition1/transition2/Target etc

Business models are narratives. The business model must be developed before the business strategy as the business strategy describes how the business model will be realized. A strategy is a directive statement that sets a direction for an organization to follow. If the strategy drives the organization to more closely follow an existing business model, then we could say that the strategy clarifies the existing model. If the strategy encourages behavior away from the organization's business models, then we can say that either the business is off base, or there is a need to update the business model to reflect new realities in the marketplace.

•  Strategy vs. Business Model vs. Business Architecture

Business strategy is the way an organization intends to realize its business model and business architecture is the way the strategy is operationalized. A Business Model shows *what* an organization *intends* to do to create value;  Business Architecture shows *how* an organization *actually* creates value. 

The business strategy of an organization is included as part of its business architecture model. The sequence is Business Model, then Business Strategy then Business Architecture. 

 The whole point of the business strategy is to define strategies for making value. They show lots of sources of value, but where are the costs? How do all those things trade-off in terms of cost and value over time? That is what matters. Each of those strategies is incorporated into a model, and the model is evaluated. That model is the business model.

 A major focus of business architecture is that of understanding and improving value creation and value flows. The business architecture content posted earlier clearly indicates this: Value Streams, Value Chains, Value Systems. 

3.    Three Levels of Business Model

It is OK to generalize the business model and represent it at a higher level of abstraction. The next level down is a component model, and the next level that is a fully analytical model. All three levels of abstraction are called "business model." One level is not more able to claim the title than the other. Each can be used at the appropriate level of abstraction based on the need. An operating business needs to have, at a minimum, the analytical level in existence. The other two are important for other reasons, especially for garnering investment.

Though a business model is an analytical object that demonstrates exactly how the numbers work, there is value in considering the different elements of a business model at a slightly higher level of abstraction. A business model is a composition of high-level elements. The most common elements appear to be:

1). Business model (value model).
2). Capability model.
3). Process model. 

• The business model may indicate possibly three aspects of models:

1) Business Model,

2) Value Proposition aspect of a business model, or

3) A model of Value Streams, Chain, System.

A "Business Value Model" is neither a model of intent (business model) nor a model of actual value creation (business architecture model), it is a model used for assessing the value of an investment, and IT system for example, to the business. In a literal sense "what value does this investment provide the business". Business Value Models are decision aids. 

• Model Encapsulation: Everything has to be in a single model, everything has to be encapsulated somehow. A business model may need to contain everything having to do with how the business generates money, and an enterprise has to contain everything that has anything to do with the enterprise. This is how most people build large programs.

There are many layers of abstraction for a business model. At a detailed level, we would expect to find an analysis model that illustrates the numerical specifics of the operation of the business (assumptions and all). However, there is VALUE in examining the business model at other layers of abstraction as well

4.    Why Business Models Fail?

·       Direct quote:
"When business models don't work, it's because they fail either the narrative test (the story doesn't make sense) or the numbers test (the P&L doesn't add up)." 

·       Direct quote:
"A business model's strength as a planning tool is that it focuses attention on how all the elements of the system fit into a working whole." 

·       Direct quote:

“A business model must be testable both from a standpoint of the "story" (the value scenario) and the numbers." 

• Either too abstract or lack of focus: Business models should be simple, intuitive, and tell the story. At the high level of abstraction, they can be a sentence long or many paragraphs. But at the detailed level, they may need to emphasize analytic information or it requires that there would be any formal analysis.  They need to identify the customer, told how they were going to charge him, and identified what value they provide.

• Business model designers may speak in different languages: For example, people from IT tend to want to create taxonomies all the time. People in business care more about the actual concepts and less about the words. They also care more about the numbers, whereas people from an EA or IT background usually have no concept of "the numbers" and so they don't realize how extremely important a quantitative model is. 

It is a little like the struggle in the sciences between theorists and experimentalists. They hate each other, but they actually need each other. EA people tend to be theorists at heart. Business people tend to be experimentalists at heart: they want to get to the concrete, to the real, to the numeric, to the results and care less about the theory. In truth, we need both, but if these two personalities don't try to understand each other's views, then they can't help each other.

5.    Business Model Innovation

The emerging digital trends bring significant opportunities for businesses to pursue growth through the methodical examination of alternative business, in essence, it means to explore alternative value creation approaches with agility. The fundamental purpose of an organization is to produce 'value' for its customers.

• Start with a process: Create a process to examine possible alternative answers to the questions in crafting business model listed at the beginning for this article, in order to shape a business model, it represents a series of decisions and each of which has a set of possible outcomes. A run-through of high-level strategic questions can produce a wide range of potential business models, and each of that can further be examined in more detail systematically to make it more specific.

• Create a new business model based on unique business capabilities: Business model re-invention may also need base on business’s core capabilities, either through providing new value-added service or product to current customers or exploring the new customer need, the designers may methodologically review a list of levers for business model components, and systematically generate the list of potential business model options, and then, narrow choices based on their core capabilities in order to maximize the value via new business models.

The business model is a living breathing thing. The analytical parts are encased in the business plan. And the analytical parts of the model are the parts that are used to make the ROI case. The challenging part of the real business model is that one must be careful of what cost optimization/restructuring/ performance measures need to be considered while trying to model a particular scenario.

Posted in: Business Process Management,Digital Master,EA,Innovation