Exploring business models

This article extends on my first article about business models, where I outlined the key elements of such models and the value in developing such models.  This article explores:

• the use of business model thinking for any system within an organisation
• the relationship of the business model to other familiar techniques
• the different considerations that arise in different enterprise contexts, with some specific examples

Systems within the enterprise

Traditionally, the concept of developing a business model has been applied at the enterprise level, inviting exploration of customers, products/services, value propositions, channels (on the output side of the business) and suppliers, partners, activities / capabilities (on the input and production side of the business) and developing a financial model that reflects an appropriate outcome (break-even or profit, depending on the type of enterprise).

These concepts can just as legitimately be considered for any system within the enterprise, whether that is an enterprise capability or an organisational unit.  It might be a particular “line of business”, a “shared service”, or a support function.  Taking people (or human resource) management as an example, it is feasible to consider:

• the HR Branch (or organisational unit) providing products and services to the enterprise as customers with appropriate consideration of value propositions and channels, etc
• the people management capability as a whole across the entire enterprise providing products and services to employees and to managers as customers with appropriate consideration of value propositions and channels, etc

Care needs to be taken in such treatments.  For the HR Branch, there is the risk of assuming its continued existence, whereas the people management capability model allows consideration of alternate sources for products and services. A genuine exploration of services and value propositions should test these against competitors (or other options) in either scenario.

This is not novel.  The application of customer service thinking to corporate services occurred several decades ago now.  For those with experience in such initiatives, it should be easy to recognise the focus as having been the “enterprise” or “system of interest”, to which the business model can be applied. This demonstrates the value of applying this “business model concept” in a fractal manner to any designated system-of-interest.  As such, it can be applied to any identified system-of-interest or organisational unit.

Relationship to other techniques

Whilst I was familiar with business-model-as-financial-model, I had not encountered the Ostwerwalder analysis and structure until about two years ago. Prior to that, along with many other architects, I had applied a range of traditional modeling techniques to the enterprise.

The simplest technique involved the use of a Context Diagram, placing the enterprise as the system-of-interest, and showing the external relationships to suppliers, partners and customers, each of which are considered in the business model .

As I started to explore value chains and value streams, it became evident that I could apply models used in Six Sigma and Lean thinking, in particular SIPOC, by considering the enterprise as a single process (P), and showing the suppliers (S), inputs (I), outputs (O) and customers (C).  This was (and is) a useful tool in making explicit these elements of the enterprise, as is the case when developing an expression of the business model.  Then, the core value stream could be expressed as a series of inter-connected SIPOC models as the next level of decomposition.

Another model which I have used is IDEFo, providing a different perspective by treating the enterprise as a function, and reflecting the inputs, outputs, controls (governance) and mechanisms (processes) which underpin the function.  Again, this model reflects some elements in common with the business model concept.

Each of these techniques demonstrates how the applicability of a system-related model to the enterprise, many of them paralleling elements that are included in the business model concept.  Analysts familiar with these techniques will be readily able to apply them to enterprises.

Application in different settings

There are different and distinctive differences in business models applied to different sectors.  Some assume that business models are not applicable to government and community sector organisations.  The following outlines some of the differences and demonstrates that the business model concept offers utility and value in all enterprise settings.

Public sector enterprises

These enterprises operate in more complex environments, where additional considerations are necessary.  Yet, the same concept and general principles can be applied, and potentially deliver additional value by establishing greater clarity and understanding of the way in which these enterprises can address the goals and objectives which communities set and expect of them.

The most obvious differences are that often public sector enterprises:

• are not required to make a profit or realise a return on assets or investment
• do not derive their income (revenue) from their customers
• do not have choice as to their client / customer base
• are measured on outcomes rather than outputs

(I may write a separate article to elaborate on these differences, as they are fundamental to better understanding the differing management challenges facing public and private sector managers.)

Business models are able to be accommodate these differences, as long as appropriate consideration is given to distinguishing between:

• customers and consumers – customers being those who pay for products / services and consumers being those who use the products / services
• treatment of income versus revenue, and profit/loss versus surplus/deficit
• outputs and outcomes – the latter arising as an effect of the existence or use of an output

In order to treat these elements appropriately, greater attention must be given to:

• the use of language and terminology
• the varying stakeholders who may have interests and be beneficiaries of the enterprise beyond simply considering customers
• the varying value propositions and benefits which may be afforded to the differing stakeholder groups

For example, I find it helpful to consider the following dimensions:

• Financial dividends (afforded to owners and shareholders)
• Economic, social and environmental dividends (afforded to other stakeholders)
• Balancing of value propositions for owners, customers and employees (at a minimum)

Each of these can be explored and expressed in an enhanced business model representation.

People management as an enterprise

This provides an example of applying business model analysis to part of an organisation as opposed to an entire organisation. Whilst it is feasible to consider the HR organisation unit, it is often wiser to consider the entire people management capability or system, as there are elements of this system within the role of every manager and executive, in addition to any specialist services which the HR organisation unit may provide.

In considering this capability or system, the business model concept prompts consideration of:

• customers – Executives, managers, employees
• services – from workforce planning and industrial relations to payroll
• channels – face to face, phone and online / self-service
• suppliers and partners – providing specialist services
• capabilities required to deliver the various services

An important element in this process is applying a combination of the business model concept and systems thinking concepts.  It is common in support functions to seek to optimise a particular function, when it is only part of the whole, and optimising a part may result in sub-optimal outcomes from a broader enterprise perspective.

This is one of a number of articles in the series “Enterprise architecture – digging deeper”.

Other series and articles can be found using the following index.

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