Have you heard the story behind the phrase “This too shall pass”? Here is one version of the folktale:
One day Solomon decided to humble Benaiah ben Yehoyada, his most trusted minister. He said to him, “Benaiah, there is a certain ring that I want you to bring to me. I wish to wear it for Sukkot which gives you six months to find it.”
“If it exists anywhere on earth, your majesty,” replied Benaiah, “I will find it and bring it to you, but what makes the ring so special?”
“It has magic powers,” answered the king. “If a happy man looks at it, he becomes sad, and if a sad man looks at it, he becomes happy.” Solomon knew that no such ring existed in the world, but he wished to give his minister a little taste of humility.
Spring passed and then summer, and still Benaiah had no idea where he could find the ring. On the night before Sukkot, he decided to take a walk in one of the poorest quarters of Jerusalem. He passed by a merchant who had begun to set out the day’s wares on a shabby carpet. “Have you by any chance heard of a magic ring that makes the happy wearer forget his joy and the broken-hearted wearer forget his sorrows?” asked Benaiah.
He watched the grandfather take a plain gold ring from his carpet and engrave something on it. When Benaiah read the words on the ring, his face broke out in a wide smile.
That night the entire city welcomed in the holiday of Sukkot with great festivity. “Well, my friend,” said Solomon, “have you found what I sent you after?” All the ministers laughed and Solomon himself smiled.
To everyone’s surprise, Benaiah held up a small gold ring and declared, “Here it is, your majesty!” As soon as Solomon read the inscription, the smile vanished from his face. The jeweler had written three Hebrew letters on the gold band: _gimel, zayin, yud_, which began the words “_Gam zeh ya’avor_” — “This too shall pass.”
At that moment Solomon realized that all his wisdom and fabulous wealth and tremendous power were but fleeting things, for one day he would be nothing but dust.* (http://www.wscribe.com/parables/index.html)
The story I am more familiar with goes like this:
It is said an Eastern monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: “And this, too, shall pass away.” * (Wikipedia)
Why do I recount these stories about that phrase? Because that phrase, while applicable to life in general, is all too true specifically when applied to business. Where once businesses thrived and brought great joy to customers, investors and employees alike they now close their doors. Management teams once considered “masters of the universe” have become vulnerable and uncertain – vulnerable to the changing winds and uncertain about what they need to do next.
What changed over the years? Many of us can remember back to the 1950’s and 1960’s when the US was the dominant industrial power. Fresh out of WWII, there was huge global demand for consumer products and America was the world’s supplier. America was flush with cash since it exported far more than it imported. While there were struggles in life, there were also some comfortable certainties. At that time people graduated from high school, got a job in the local factory, married their school sweetheart and raised a family. Kids played unsupervised until dark and neighbors watched out for the safety and behavior of all the kids on the block.
All of that has changed. American industry is no longer ‘the only game in town’ and the US is far from being flush with cash. Global demand remains but Americans are competing with low-cost labor from many growing economies. A life-long job with a local employer is not a typical scenario. It is more likely a worker will change jobs and professions multiple times during their careers. And kid’s activities are so organized in many cases they don’t know how to just go outside and play. People don’t just drop in to visit any more and the parents of neighbors don’t raise their voices to other people’s children.
You may wonder how we got to where we are. We did it just like we do most other things – one unintentional step at a time. Our culture did not change over night. It has morphed relatively slowly but has been doing so for such a long time that it is bearly recognizable in some respects. How many of you have ever had a puppy? You were completely delighted to have that cute little bundle of love and energy. Every day you would play with it and you never really realized how much it was changing until someone who had not seen it would stop by and exclaim surprise at how much it had grown. When you are there every day you don’t see the tiny changes.
Same can be said about our culture and the expectations of customers. Look at the automotive industry in its early days. First came Henry Ford who was willing to sell a car of any color – as long as it was black. Then William C Durant formed General Motors and offered the environment a variety of styles and colors. GM was so successful by tapping into those customer wants that Henry Ford had to close his doors and retool in order to compete with the new set of customer expectations. Today we are talking about mass customization where a customer can pick and chose options for his/her car and still have it delivered in a couple of weeks.
The changing competitive environment spells disaster to those companies that can not adapt. Obsolete products and processes mean shrinking market share and reduced profits. Senior executives with established companies are experiencing sales and profit problems and are uncertain about how to sustain their existing business let alone grow it over the next few years. These are companies that started years ago, had success, grew and then over time saw the bloom fade off their rose and now know troubled times are at hand.
The problems these companies are facing are not due to a lack of effort or intelligence by the management teams and the employee workforce. Quite often some of the hardest working people are busy in companies that are under performing. You could say that it is precisely for that reason that those people are working so hard. They are trying to bail out the water in their boat faster than it is coming in lest it sink them. The end result is that they don’t have enough time to do non-urgent and important activities (quantrant II in Steven Covey’s ‘Seven Habits of Highly Effective People). These dedicated people cannot do the long-term planning because they are too busy fighting the short-term tasks at hand. They are consumed by the daily tactical cycle of putting out fires and never having quiet moments to figure out what problems are at the core of the business and what solutions have to be put in place.
A frantic work pace becomes the norm. The thinking of management takes on a more critical view of their workers. Those employees who go home at the end of the scheduled work day are looked down upon. Apparently they don’t share in the ‘sense of urgency’ felt by others. The business leaders firmly believe that the people who really understand the situation and how important work is stay late because they share their concern for the survival of the business.
Company executives try everything they know without gaining the results they are looking to achieve. Years have been invested in creating and trying to execute new strategies only to see little, if any, progress. Now they may be willing to try something slightly different.
Sometimes the performance problem exists in part because the executives of these companies lack the understanding of what the overall competitive environment was like when the business was first started. They don’t know the context of the company within the time when it was created. Context is King. Without knowing what it was like back then they will fail to understand just how much that environment shaped their business model design. Now take that business model design, from those long-passed glory days, and insert it into today’s world. Most of the product, process and organizational designs no longer work. They have become irrelevant.
This is apparent in Tom Peter’s book “Re-imagine”. Mr. Peter’s discovered that of the top 100 companies in the US in 1910 only 18 survived over the next seventy years and only 2 outperformed the stock market. He further substantiates that point by noting that of the S&P 500 companies in the 1950’s more than 80% failed to exist 40 years later.
These statistics tell us that business model designs do indeed become obsolete. What worked as recently as 40 years ago no longer provides what is needed in today’s world. When customer expectations, competitor offerings or new materials change so must designs. The question is not “how good is the quality of the design?” but instead “how good is the design in relation to the current environment?”.
The idea about quality of design in relation to the current environment must be applied to different levels of the organization. Think of products / services, processes and organizations as unique parts of a business and take the time to realize that each one of those parts has a design. The idea of designs being
relevant or obsolete needs to be applied to the parts of a business as well as its whole.
What determines if a process design is no longer relevant? Some will tell you that it is strictly the customer and they like to use the term Outside In. I happen to believe they are only telling you half the story. Processes have to fulfill promises made to customers while at the same time contributing positively to the bottom line.
Promises to the customer can be broken down further into price, quality, lead time, and desirability (appearance, features, functions and options). The term I like to use when referring to those promises is Value Proposition (VP). We all look for great value before making a purchase. If one particular product has the greatest perceived value (combination of price, quality, lead time and desirability) then people will clamor to buy it.
Interestingly it is usually not the least expensive product that becomes
the market leader.
Who gets to determine what the Value Proposition is for a particular product? Certainly not the executives of the companies offering the product. This is an important concept to understand and BPM ultimately plays a key role. I can say generally ‘it is the market place that determines the value of a product’. When I say market place I am referring to the sum total of all customers within a given market. The market determines: what is a reasonable price for a given product; it determines the level of quality it will accept, and it decides how long it will wait for the product to be delivered. Additionally it is also looking for certain features, functions and options and a pleasing appearance.
It is very important for all executives involved with creating demand for a company’s products to understand the Value Proposition of the market place for those products it is offering. The market’s VP is the baseline. Next it is important to know how well a company is performing in relation to that baseline. Are its products more or less expensive? Is the quality higher, the same or lower? How long does it take to supply products to the customer? How well does a
company’s product stack up in its features, functions and options?
There is one other activity worth executing before moving to the next step and that is to take a look at the competition and how well they are performing in relation to Value Proposition. This will give executive very good information on where their products are falling short and where they have a distinct advantage.
While executives do not get to decide the expectations of the market place they do get to decide what steps their company will take with the VP information they have collected. They know market expectations, their company’s performance in relation to those expectations and how well the competition is meeting what the market wants.
The VP analysis helps executives know where to focus their time and energy. It helps to think about this idea if you realize that three of the four components of the Value Proposition can be directly linked to BPM: price, quality and lead time. It also helps to think about the VP as the performance requirements for any process improvement activities. “Performance requirements for processes should not be arbitrary”. BPM practitioners should take the time to determine what the performance requirements are for any process they are going to improve. And then the BPM person must design processes where the performance capabilities are equal to or greater than the performance requirements.
If the BPM professional designs and implements a process that meets the requirements of the market (outside in) and the shareholder (return on investment) then that process will be relevant, for now.
Sustainable performance, at the business or process level, is only possible if the executives of firms adapt their existing designs to accommodate the new
performance requirements of the company. As we look at the existing requirements of today’s environment we can rest assured that “this too shall pass”.
Before you go further in reading this document I want you to pause and answer one question. How do you define Business Model? If you take the time to create a thoughtful response to that question you will gain more from what I have to say.
The term business model often surfaces when CEOs are reporting on the success (or failure) of their companies. They use the term in so many ways that it brings doubts as to just how well they understand what a business model actually is. The next time you hear the phrase being used try to understand exactly what they are talking about. See if you can conceptualize their description.
I have found it difficult to do that because when many leaders are saying Business Model what they are referring to are vague images in their minds of what their business should look and act like. It is more of a transient vision statement than an actual model. Unfortunately for them, and those that work for them, that apparition exists only in their minds. And to make matters worse that ghostly image is unintentionally evolving. What was there three months ago has morphed into something new without anyone else knowing, even though there are projects and initiatives underway to try and capture the earlier vision. If the model is not visible how does one go about building it? How can a group of executives ‘know’ they have a common understanding of the desired model if none of them are looking at a model?
There was one company that had three executives and a strategy consultant spend nine months developing a strategic plan. The management team needed to have a plan in place in order to meet certain goals. At the end of the process the group had settled on a particular corporate direction and some of the key strategies needed to make their vision come true. The most important strategy centered on the company having a ‘World Class Supply Chain Management System’ put into place. The CEO upon being asked to clarify what that would look like stated that the company would spend exactly what it took to give the customer exactly what it wanted. If the company spent one dime more than was necessary then that would be a problem. The CFO was asked the same question and he responded that being a world class Supply Chain management meant studying Wal-Mart, P&G and Dell and developing something superior to their processes.
Compare those responses and ask yourself if you think both of those people had the same vision in mind. It is obvious that they didn’t. Here were two people who had spent considerable time together to co-develop the strategy, could repeat the words of the strategy but weren’t on the same page when it came to how to execute that strategy. That is the danger of language – assuming we all mean the same thing when words are being used.
The term Business Model can also be found in the world of academia. In undergraduate business studies but especially in MBA programs the phrase is often used. Case studies of companies typically refer to their business models. The term is used hundreds if not thousands of times in the course of obtaining an advanced degree.
Since the phrase is so widely used in business and universities wouldn’t it be reasonable to expect a common definition? From seeing that term used in many different ways I came to the conclusion that people don’t share a common understanding of what constitutes a Business Model.
To verify my suspicions I conducted two surveys. One was with a group of business people and university students and the other was with a graduate business class. The audience in both cases was there to listen to a presentation I was going to make on the concept of Business Models. Prior to taking the surveys I asked those present to raise their hand if they were familiar with the term Business Model. Every person showed me they ‘knew’ what the term meant. My next instruction was for them to write down their definition on the piece of paper I had given them without conferring with anyone else. I was not looking for a homogenized version of the term but wanted to hear from each person individually. I also asked them not to include their name. What they had to say was more important than who said it.
I collected and recorded all the responses and now have dozens of different Business Model definitions. Allow me to share the beginning of just seven of them.
- A business model is a process ….
- Business model is the technical design …
- A business model is a description ….
- Rules and goals of the business as a whole.
- The method of running the business …
- A plan …..
- The strategies needed ….
As you can see from just these definitions my hypothesis was confirmed. Every one of those definitions is very different than the others. A description is certainly different than a process. Rules and strategies bear no resemblance to each other or any of the other descriptions in that list. There is a vast array of ideas being applied to the concept of Business Model.
The question begs to be asked: “How can business leaders and students attending the same university, studying the same field, have such a large array of definitions for one of the most basic business concepts?”
I think I know why.
It is not unlike the parable of the seven blind men and the elephant shown below. None of the seven men had ever experienced an elephant before and therefore had no basis or context for this magnificent creature. Each blind man was asked to describe an elephant. The first one touched the tail and described it as a rope. The second one touched a leg and said it was like a tree. One touched a tusk, another an ear, another the back,… While each man’s description of the elephant was technically correct if a person took only that one perspective s/he could not know what an elephant looks like.
In order for those men, or anyone else for that matter, to know what an elephant looks like they need to know all of its parts and their relationship to each other. By viewing each part individually it is not possible to know what any complex entity looks like.
A business is a very complex entity. Now mentally substitute the elephant in the story about with the idea of a Business Model. Scan the list of seven different definitions from my surveys and understand that each of those definitions is just one part of the business model.
I have come to understand that the reason why I receive so many different definitions for a Business Model is because it isn’t just one thing. Plans, rules and regulations, processes, strategies, design,.. are all different parts of the Business Model elephant. Each piece doesn’t capture the totality of the entity but it does provide one glimpse.
That doesn’t mean a definition for a business model can’t be created to describe a business model. I have spent many years in this area and have developed a definition that works well. It aligns perfectly with the system I have created to make the Business Model Design a reality.
A Business Model is:
An aligned design of the products, processes, people and support functions that enables a business to achieve sustained performance.
My definition encompasses all of the ‘parts of the business model elephant’ listed by the seven responses from my surveys. Some of the survey responses are easily seen in the definition while others exist at a lower level. My goal was to use the fewest words to capture the totality of a business model and I believe I have succeeded. If there are aspects you believe to be missing, such as strategies and goals, trust that they are accommodated in the process but not readily apparent in the definition.
I am a much more visual person than auditory. When I was in a senior executive role my staff would come to me with an idea and I would always say “Show me the picture”. Without the picture I didn’t know if we were on the same page. We unknowingly use the same terms when we are referring to different ideas. Just go back to the seven responses listed above for proof.
With that in mind I have created a visual document to go with the above definition for Business Model. It is my “Show me the picture” of a Business Model but unfortunately I am unable to import it into this document. If you were able to look at it you would see that the diagram illustrates how the business entity exists within the competitive environment and then how each of the components of the business exists within the overall context of the business entity. Context is King and that understanding is embedded into this approach.
The model works regardless of whether the company provides a product or service. And while I use the term ‘business’ I am not referring to only for-profit companies. It is any entity that provides a product or service for someone else. Corporations, single business units, agencies, organizations and even departments can all use this diagram to show its inner workings.
The picture is a high-level view. Each of the parts in the diagram can be decomposed to help the reader better understand the context of what it is they are viewing.
When you study my Business Model Design take notice of the red arrows throughout the diagram. Those arrows indicate a flow. That flow actually represents a progression or sequence which in turn creates dependencies resulting in this document taking on a more three-dimensional perspective.
Look to SlideShare for a PowerPoint by me on this topic. There I wll be able to share my business model design diagram or canvas.
Before closing there is a concept I wish to share with you. “The environment determines the relevance of a design”. This is critical to understand because it can and should be applied in every aspect of a person’s life. My definition of Business Model ends with the words ‘sustained performance’. The only way to achieve that level of performance in anything we do is to constantly adapt to a changing environment. That is true for products, processes and businesses alike. As the expectations change so must the corresponding designs.
There is an entire system that goes with this diagram. And when applied it creates a laser-like focus on what a business needs to do in order to achieve its goals. That brings us full circle to the idea that “It’s all about Performance”.
I spend time in several Business Process groups on LinkedIn and one of the terms I keep seeing is “Outside In”. I keep seeing people using that phrase as if they just had an epiphany or that they just came over the ridge and have seen the promised land. What I don’t understand, or what surprises me, is that it seems to be a new thing to experienced people. “top down, outside in” is how everything should be designed. How do you go about designing something where you have not established its purpose? How do you design something if you don’t create specifications (performance requirements)? Outside In is common sense and I don’t see why it is getting so much play.
So I responded to a discussion and wrote the following:
‘Outside In’ is about Context. Understanding Context is critical in every line of thought – not just BP design.
In order to understand the purpose of an activity you have to understand it in the context of the process in which it exists. Processes are a collection of activities. Evaluating an activity on its own has some merit but to fully understand the activity one must understand it within the context of the process in which it exists.
Seeing an activity on its own will not provide you with an understanding of how it fits into the whole. Every activity has a cost associated with it and should also have a value associated with it (non-value added activity?). The activity receives its performance requirements from the next level up – the process.
In order to understand the purpose of a process you have to understand it in the context of the system in which it exists. Systems are a collection of processes (Senge – Fifth Discipline). Every process has a cost associated with it and its corresponding value. The process receives its performance requirements from the next level up – the system.
Every business has a number of systems which support it and to understand the performance requirements of those systems you have to view them in the context of the overall business. The system receives its performance requirements from the next level up – the business.
And there is where some companies have stopped their thinking. They view their systems, processes and activities only in the context of the business itself. They are operating in a vacuum and use performance indicators focused within their four walls.
However those businesses need to go the next level up – the competitive environment. They need to add another layer of context. The business operates within the context of the competitive environment. If a business does not factor the competitive environment into their performance requirements it will be flying in the dark. And the likelihood it is going to hit the mark (from the competitive environment’s perspective) is slim to none.
Hence the need for Outside In design. While one can look at performance from the ground up (activity to process to system to business) the requirements come in the opposite direction. One needs to understand the competitive environment first. One has to know what the outside (competitive environment) is requiring to know the minimum performance requirements for the business and then it cascades all the way down to activities and individual employees.
And the competitive environment is not defined solely by the expectations of the customer.
What happens if your company slightly exceeds customer expectations but there are competitors offering even more? In that situation you will most likely lose market share. Remember, your investors are not the only ones looking for a Return on Investment. So are the customers. Customers want to get the most for their money (the greatest return on their investment) and if your competitors are offering more than you then you need to adjust your performance requirements. You need to be offering a compelling Value Proposition to the market and if you don’t understand what the customers want and what your competitors are offering then you will most likely fail.
Companies don’t get to decide what the performance requirements are for products and services. Customers do.
That is one perspective on Outside In design. Where does your understanding differ from mine?
I am not certain if it is a matter of being lazy or if it is nature’s way of not burdening us with too much detail but regardless of the reason people do not ‘think’ correctly about governments, religions, races or businesses. Our thinking falls down when referring to any group or entity as if is one thing.
We often hear about how inefficient “the government” is in the US. “The government can not run anything” or “the military and intelligence should not be used in the same sentence”. What we are failing to realize is the government is not one thing – it is many. The military (while being protrayed as having some questionable purchasing practices) is composed of many brilliant people. The military is many.
And when we speak about business we should remember that it is not just one thing. I spent seven years in the role of CIO. One of the challenges facing CIOs centers on the idea of aligning IT with ‘the business’. And here is when I learned that ‘the business’ does not exist. The business is a collection of disparate groups, all sharing a common banner, but operating relatively independently of each other. Each have their own metrics, own goals, objectives, and key performance indicators. Each being led by a person wishing to have a World Class organization.
Essentially each department is a business within a business. I witnessed it first hand when I sat in on the assessment of the alignment of an IT department with the rest of the business. The findings were not in favor of the IT department. The consulting company determined that more than 80% of the IT projects did not support the key drivers for the business. The consulting company therefore determined the IT department was not aligned with the business. Just how wrong the consulting company was became apparent when it was discovered that every one of those projects originated outside of IT. Those projects came from ‘the business’.
What you have is the situation where ‘the business is not aligned with the business’. Actually there is no such thing as ‘the business’. ‘The business’ was never designed as an entity but instead it evolved one decision at a time and just happens to look the way it looks.
This is the primary achilles heel for every business – business executives do not understand that the business they are leading actually has a design and that design is as tangible as the design of their products or processes. Nor do they understand that the design of a business has the greatest impact on the performance of ‘the business’.
Wouldn’t you like to see what your business design looks like? Wouldn’t you like to be able to analyze the performance capabilities of your design and make any necessary changes to improve its performance?
If you took the time to have your business designed – then your business would actually exist. Without the design your business is really just a bunch of departments acting mostly independently. Good luck with that.
I do find some interesting discussions on LinkedIn. I tend to spend my time with Business Process people since they have a slightly better concept about how something invisible (process and/or business) can have a design.
Here is my 2 cents when addressing the idea of how some business thinking is fundamentally flawed (which I agree in principle).
I know I sound like a one note singer but I am willing to live with that. I want to comment on the idea of “Fundamentally flawed thinking for the 21st century..”
It is all about Context! It is my contention that the relevance of any design is determined by the environment in which it exists. Think about that sentence and apply it to any design. Apply it to processes, to products and to businesses.
Businesses are created within the existing environment and survive because its design is compatable with the environment. But as we know time changes things. The expectations of the customer change (outside in design), the offerings of the competition changes and materials and technology change. What was a leading design becomes obsolete at an ever quickening pace.
Important tenets that affect business performance (according to me):
1) Businesses, just like products and processes, have designs that can be documented.
2) No product, process or business can outperform its design
3) Design dictates performance
4) The best any product, process or business can do is to reach the maximum performance capabilities of its design.
5) The best any strategy can do is to help the business reach its maximum performance capabilities of its design.
6) Strategies do not change the design of a business.
7) Four step process to business (or process) performance: Design, Implement, Execute and Manage. Carpe DIEM
8) Businesses are much more than processes. Don’t get lost in processes. You must have the Context for processes just like you must have the Context for products and the other facets of the business.
The most important responsibility of any executive is for the design of the business and for executives to not understand that is the biggest flaw in thinking today!
That concept fits the idea of Outside In design better than most people realize. One can only create a relevant business design by understanding the context in which it exists (the outside). I can go on and on about this but will stop here.
One LinkedIn discussion centered on truths. Here was my offering.
It seems to me the issue is not around set theory and the axiomatic approach. Board members (representing those holding the equity of the company ) and customers (representing those deciding to spend their disposible cash with your company) don’t care.
Executives are at the center of the fulcrum. One the one side are the equity holders wanting a better return on their investment and on the other side are the customers who want the greatest value for the money they are spending. And the business leaders are trying to navigate through the existing environment and give each what they desire.
Here are a few ‘truths’ those executives should be paying attention to:
– Products, processes and businesses have designs that can be documented.
– Products, processes and businesses can not outperform their design.
– Changing strategies has no effect on the design of a business.
– Strategies are executed, designs are implemented.
– Strategies can only be executed if the design can accommodate them.
– Strategies need to be embedded in the design of a business.
– Design, not strategy, is the key to change.
Getting to KPIs. Their use is in determining when a design needs to be updated. Since designs gain their relevance from the existing environment KPIs need to be sensitive to what is changing.