Professors Øystein Fjeldstad and Charles Stabell have developed a framework of three generic types of business models –

• Solution Shops – Employ experienced intuitively trained experts whose job is to diagnose problems and recommend solutions. High-end consulting, law, advertising firms, R&D organizations, and specialist physicians’ diagnostic activities in hospitals are examples. The firms abilities to deliver value to customers are dependent on the people who work there; standardized processes are uncommon in solution shops.
• Value Chains – Manufacturing, retailing, and food service companies are examples. These companies bring inputs of materials into one end of their premises, transform them by adding value, and deliver higher-value products to their customers at the other end. The ability to deliver value is embedded in strong, standardized processes.
• Facilitated User Networks – Telecommunications, Insurance, and Banking are facilitated user networks. Participation in the network typically isn’t the primary profit engine for participants. Rather, the network is a supporting infrastructure that helps the buyers and sellers make money elsewhere. The company that makes money in a user network is the one that facilitates the network.

Business model can be best described through nine building blocks that show the logic of how a company intends to make money. The nine blocks cover the four main areas of a business: customers, offer, infrastructure, and financial viability. The business model is like a blueprint for a strategy to be implemented through organizational structures, process, and systems.

Per Business Model Generation Book, following are the 9 blocks –

• Customer Segments – An organization serves one or several customers.
• Value Propositions – It seeks to solve customer problems and satisfy customer needs with value propositions.
• Channels – Value Propositions are delivered to customers through communication, distribution, and sales Channels.
• Customer Relationships – Customer relationships are established and maintained with each customer segment.
• Revenue Streams – Revenue streams result from value propositions successfully offered to customers.
• Key Resources – Key resources are the assets to offer and deliver the previously described elements.
• Key Activities – Performing a number of key activities
• Key Partnerships – Some activities are outsourced and some resources are acquired outside of the enterprise.
• Cost Structure – The business model elements result in the cost structure.

“Multi-sided Platform” is one of the business model patterns. Multi-sided Platform brings together two or more distinct but interdependent groups of customers. Such platforms are of value to one group of customers only if the other groups if customers are also present. The platform creates value by facilitating interactions between the different groups. A multi-sided platform grows in value to the extent that it attracts more users, a phenomenon known as the “Network Effect”.

“Network effects” and “Positive feedback loops” are economic terms that describe the snowballing benefits to front-runners in some markets.

For example, the more people that use Google search, the more data the company has, and that data is the raw material for refining its search results further. And the greater its market share in search, the more advertisers wants their ads placed on Google to reach the largest audience. That, in turn, solidifies Google’s position as the dominant ad market, and strengthens its pricing power. According to Bill Gates, “There are several positive feedback loops in this business, and they are particularly powerful”.

A business model describes the rational of how an organization creates, delivers and captures value. A business model dictates the long term and short term strategies for competitive advantage which in turn get translated to Operating model (Business Process, Technology, People, Ownership and Metrics) for execution. One example for “Multi-sided Platform” is developing a gaming platform. The platform’s value for a particular user group depends substantially on the number of users on the platform’s “other sides”. A video game console will only attract buyers if enough games are available for the platform. On use it. On the other hand, game developers will develop games for a new video console only if a substantial number of gamers already.

• From a strategic perspective, one way multi-sided platforms solve this problem is by subsidizing a customer segment. Though a platform operator incurs costs by serving all customer groups, it often decides to lure one segment to the platform with an inexpensive value proposition in order to subsequently attract users of the platforms “other side”.
• From an operating model/execution perspective, the organization aligns the sales, marketing, services, and support functions to deliver margins required by business for success.

Business Models, Strategies, and Operating Models are interrelated.

A study of the 1000 Largest US Firms…

Link to earlier post here

A Business Model is a representation of how an organization make or intends to make money. It can also be defined as a simplified description of how a company does business and makes money without having to go into the complex details of all its strategy, processes, units, rules, hierarchies, workflows, and systems.

The interest in business models comes from two opposing sides:

• Established companies have to find new and innovative business models to compete against growing competition and to fend off insurgents.
• Entrepreneurs want to find new and innovative business models to carve out their space in the marketplace

Within this context the business model concept is a particularly helpful unit of strategic analysis tailored to today’s competitive business environment. It helps executives as well as entrepreneurs increase their capacity to manage continuous change and constantly adapt to rapidly changing business environments by injecting new ideas into their business model.

In order to deal with market changes, the companies have to handle five changes that threaten company’s growth:

• Erosion of low-end product segments.
• Erosion of customer segments.
• Erosion of micro-segments.
• Erosion of traditional business boundaries.
• New intermediaries and new control points.

Execution (Performance metrics) determines whether Strategy is working on not, and Execution is dependent on the Operating Model, and Operating Model’s relevance is dependent on Business Model.

Gary Hamel’s book on “The Future of Management” shares a quote from Nobel Prize winning zoologist Sir Peter Medawar – “Dull or piffling problems yield dull or piffling answers”.

A review of extensive library on managing change reveals a disturbing fact. Nearly all the accounts of deep change – entailing big shifts in a company’s business model or core mission – are stories of turnarounds. It seems that deep change is nearly always crisis-led, episodic, and programmatic – accomplished through a top-to-bottom, cascade of tightly scripted messages, events, goals, and actions. Sadly, it is a rarely opportunity-led, continuous, and a product of the organization’s intrinsic capacity to learn and adapt.

The subject of learning organizations has been talked about for many years through seminal work of Peter Senge in his book “The Fifth Discipline. The art and practice of the learning organization. Senge sets out the five ‘competent technologies’ that build and sustain learning organizations. His emphasis on systems thinking as the fifth, and cornerstone discipline allows him to develop a more holistic appreciation of organization (and the lives of people associated with them).

Learning Organization is one that acquires knowledge and innovates fast enough to survive and thrive in a rapidly changing environment. Learning organizations (1) create a culture that encourages and supports continuous employee learning, critical thinking, and risk taking with new ideas, (2) allow mistakes, and value employee contributions, (3) learn from experience and experiment, and (4) disseminate the new knowledge throughout the organization for incorporation into day-to-day activities.

While there has been a lot of talk about learning organizations it is very difficult to identify real-life examples. This might be because the vision is ‘too ideal’ or because it isn’t relevant to the requirements and dynamics of organizations.

So, how do you build and organization that is capable of continuous self-renewal in the absence of a crisis? Is innovation a random chance?

Procter & Gamble, Starbucks, Dell, Best Buy, Threadless, Microsoft, and Nike have all created digital platforms that allow customers to help them create new products, messages or seek feedback. Starbucks received over 17,000 coffee ideas in the first 14 months since the launch of its proprietary online forum, mystarbucksidea.com. Customers, of course, are increasingly demanding participation. They expect the ability to co-create and lead innovation, and their volubility has forced companies to devise creative solutions to be competitive in a new bottom-up age.

Crowdsourcing is not just limited to marketing materials – in this new era of digital marketing the concept is spreading to embrace software development as well. Same principle – you have a need and someone out there can help you meet that need, it’s just a case of finding them.

My opinion is shift from having a reactive culture to one that’s proactive by seeking ideas from the crowd will be disruptive. Transparency of the ideas generated by the crowd; and accountability – how are the ideas making their way into products; will have to be embraced. Of course, there has to be a delicate balance between encouraging participation and maintaining clarity of overall business objectives. As crowdsourcing continues to accelerate, the biggest question is how it will affect business writ large. But it will certainly usher in radical changes to business models and business systems.

1. Awareness that Mental models influence Architecture – The person in charge of the architecture will bring his patterns into play.

• Green is in big play now. IT Data Center Consolidation, virtualization, Cloud Computing, SOA. Operating Models and Organizations structures have evolved over the last two decades.
• You cannot come up with anything original unless you are willing to make mistakes.

2. Invest in Perpetual learning – Architectural History should be big on every practitioners list. The big example that I have constantly used is the building of Aswan Dam in Egypt.

• Keeping the historic context in mind – do you know what influenced the current architecture? Do you know the impact of change to upstream and downstream outcomes
• Seeing what this is next – is very hard for the Enterprise Architect practitioner.

3. Awareness that consequences of your architecture will be unknown in long term

• Price of responsibility is loneliness – Testing an idea before completely implementing it, and having enough data to make factual decisions in most cases is possible. However, when you are innovating sometimes you have to take risks. Enterprise Architect should be willing to make a decision based on instinct, and price of responsibility (success or failure) is loneliness.
• Dependence on quality of data – Generations of Analysts, Data “People”, and Decision Makers have grown up with the principle of GIGO – Garbage in, garbage out. It made a lot of sense for a very long time. The web unfortunately threw a big spanner into the works because now we have too much data. It seems absolutely dumb to argue that while the quality of data used to make decisions is important, it is actually not that important to have the highest data quality.
• Consequences of Architecture – The evolution of the architecture will depend on how the solution will be adopted by the organization. The importance factor is not just the scalability of the solution but the impact of this solution overall running of the business. The solution becomes mission critical if the solution is revenue generating. The government regulations, taxation policies on the top line revenue, the capabilities of the organization, evolution of the workforce again will drive the architecture into unknown areas not factored into the mental models of the Architect practitioner. The solutions built in each of the eras – Mainframe Era, PC Era, Client Server Era, and Web Era have continued to exist in one form or the other. The complete Rip & Replace is non-existent.

According to Boston Consulting Group, Operating for value makes value created by operations explicit by concentrating not only on reducing costs but also on creating opportunities for additional revenues through higher-quality service. The framework consists of three basic initiatives –

1. Design a new Target Operating Model (TOM) using the desired customer experience as a starting point
2. Draft a road map that leads to the target operating model
3. Install governance structures that ensure effective implementation

Roadblocks to these initiatives include –

• Internal lines of accountability that prevent end-to-end thinking
• Work forces that lack sufficient motivation and incentives
• Legacy IT systems that complicate change initiatives

Design a New Target Operating Model and IT Architecture

In a perfect world, business model and the operating model complement each other perfectly. Unfortunately this is achieved only by best-in-class players. Moreover, for such players, high levels of customer satisfaction are usually accompanied by the best expense and loss ratios. For other players to achieve the alignment between business and operating models, they should start by defining the desired customer experience, which facilitates a true understanding of how the performance of operations process created value for the business.

There are two types of operations processes, and they create value in different ways.

1. Complex operational process – create value through influencing the customer’s purchase decision and through exercising business judgment
2. Standard operational process – create value mainly through their level of efficiency

Companies also need to understand how business choices drive the costs of operational processes – costs that typically rise if the business allows too many variations and exceptions to the core products and services offered. The exact nature of complex and standard processes for any company is determines partly by its business model and product portfolio.

Once the complex and standard operational processes have been identified and fully defined, the next step is to translate these processes into a sharply focused target operating model and IT architecture that keep the end-to-end perspective foremost in mind. Exploring different options for the operating model can spark discussions and help address such issues as –

• Processes that should be fulfilled by customers themselves – for example, filling in a form on the Web
• Processes that should be handled by first-line support personnel shared across business line
• Should the customer relationship be managed by corporate entity or by sales agents

Draft a Road Map that leads to the Target Operating Model

BCG’s operating-for-value framework contains eight levers for drafting a road map that leads to the new target operating model. These levers are not applied incrementally but in a holistic way.

• Optimize Processes
• Increase Automation
• Monitor Performance Indicators
• Streamline the product portfolio
• Separate standard and complex support tasks
• Optimize cross-line operations
• Optimize cross-border operations
• Outsource or offshore certain activities

Install Governance Structures that ensure Effective Implementation

Operating for value is not just a one-off project that lasts ore a few months. It is a permanent new way of approaching how operations can be continuously optimized. The key governance question concerns which specific aspects of operations should remain the responsibility of individual business lines and which aspects should be the responsibility of the group entity. The objective of the governance approaches should be to ensure that synergies are captures and that all initiatives are in line with the target operating model and IT architecture.

According to Forrester, Capability Map is a model of the firm associating the business capabilities, processes, and functions required for business success with the IT resource that enables them.

A business is characterized by the capabilities required for that business to accomplish its objectives. Each capability is itself a collection of actions the business takes — like responding to a customer’s service request or defining sourcing strategies for new products.

In a business capability map, each business capability is associated with -

1. Business goals. The importance of a capability is characterized by expected outcomes resulting from the capability, expressed as strategies, objectives, and metrics. These work best when business management defines specific results for each capability — like reducing cost per package-mile for a shipping capability. But outcomes will inevitably cross multiple capabilities — like the goal of speeding idea-to-product time, which spans market research, product development, and manufacturing capabilities.
2. Processes and functions — and the information they work on. Business capabilities comprise business processes and functions that flow within and across them — like the process order-to-ship, which spans capabilities like sales, order taking, inventory management, and shipping. And the business processes and functions have information they work with — like order-to-ship process and associated applications, which manage a list of goods requested by a customer against finished-goods inventory or manufacturing capacity.
3. The “bill of IT.” A business capability map employs a “bill of IT” — the collection of the hardware, software, and IT services required to enable a specific business capability. The bill of IT is simple when there are dedicated systems but becomes complicated when a single system supports multiple capabilities — as in a virtualized data center.
4. Future-state capabilities. Capability maps can be the basis for comparing the “as is” and a “to be” state, yielding a picture of capability, process, and bill of IT gaps between these two states. And because the model maps capabilities to business goals, organizations, processes, and information, the future-state capabilities can form the basis for both IT and business planning.