Beyond Business Models
Talking about “our business model” is a pleasant diversion. It was the diversion of the dot.com era, the fodder for venture capitalist pitches and the endless source of conversation – and speculation – at social gatherings around the globe. Everyone was drawing models on napkins, and no one was executing. It’s the fun part of business, but in reality it’s the most serious of all the matters before us. Creating it and implementing it successfully is real work.
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.
“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. 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 I think the term ought to mean, let me point out a few of the ways people use it that have little bearing on converging the management of business and technology:
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 to form an effective basis for business/technology convergence, 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 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 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.
In fact, I’m going to use a different term for business model: Strategic Enterprise Architecture, or SEA. This will allow me to break it down into its components in a way that makes it an operational definition. Of course the term architecture can mean different things to different people as well, so let me narrow it down.
Enterprise architecture isn’t just technology. Some people assume that enterprise architecture describes only technology assets. By ignoring business architecture altogether, this misconception encourages companies to develop a road map that innovates technology – but with no direct connection to business and process.
Business 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.
A question often asked is how to quantify the value of a strategic enterprise architecture, and how that value can be demonstrated in financial terms. According to Steve Philips, the chief information officer of Avnet, Inc., the $15.6B worldwide distributor of electronic components, computer products, and technology services, it’s a tough question to answer.
“When I look at the value of enterprise architecture, I don't believe you can calculate the return on investment. The value of enterprise architecture only becomes apparent over time when the value of a strong enterprise architecture is demonstrated through the delivery of new initiatives and capabilities. The right enterprise architecture can enable business growth rather than be an inhibitor to growth.”
Perhaps the best way to visualize what an SEA 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 firm – This might include such elements 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 like 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 – This could include all of the resources that the firm 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 business environment in which the firm 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 SEA 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 business scenario models. Scenarios could vary according to the revenue required to qualify as a high-value customer.
Keep in mind that explaining an SEA by example poses somewhat of a problem. Although it explicitly differentiates an SEA from misconceptions like the cocktail napkin one-liner and the financial model in disguise, companies aren’t limited to one empirically correct set of elements that should make up the SEA. So while the categories and elements expressed here provide a pretty good example, they shouldn’t be considered a cookie-cutter mold after which every SEA should be patterned. Each company’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 companies 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 firm exists.
Most large organizations 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.
The direct benefits that companies derive from SEAs come from two sources. First, and most obviously, there are the specific elements and attributes that make up each SEA. Second, and of equal importance, is the actual process of researching and defining the SEA – whether constructing a current SEA from scratch or developing scenarios for impact analysis. The deliberate act of creating the SEA compels decision-makers to think through the complete business landscape and ultimately uncover hidden opportunities for improvement.
This is obviously not a matter for a two-day meeting or a weeklong 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. “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 an SEA.
**The above article is adopted from the BTM forthcoming research series, “Contours of Convergence.”
Faisal Hoque is an internationally known entrepreneur and author, and the founder and CEO of BTM Corporation (www.btmcorporation.com). His previous books include Sustained Innovation and Winning The 3-Legged Race. BTM innovates business models and enhances financial performance by converging business and technology with its products and intellectual property. © 2009 Faisal Hoque | firstname.lastname@example.org