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.

1. A business model is a process ….
2. Business model is the technical design …
3. A business model is a description ….
4. Rules and goals of the business as a whole.
5. The method of running the business …
6. A plan …..
7. 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”.

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?

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.

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.

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.

My response to that question is:
You have hit directly at the core of a problem I keep running into.  I have been trying to connect conceptually and intellectually with both business leaders as well as academics around the idea of business design. Every principle you can think of in relation to process design is equally true for business design.

Here are some examples:

• A poor process design can never result in great process performance.
• The key to process performance is in the design, not the strategies.
• You can not execute process strategies unless the process design can accommodate those strategies.
• Processes have a design, just like products.
• Performance requirements for processes should not be arbitrary but instead based upon requirements of the market place and stakeholders.
• Before making adjustments to a process you should always document the process to reduce the likelihood of unintended consequences.
• When documenting a process what one is actually doing is documenting the design of the process.
• Process management consists of four steps (DIEM): Design (according to performance requirements); Implement (the design according to specs); Execute (the design according to specs); and Manage (keep track of KPIs to know whether design is meeting requirements of two sources: customers and shareholders).  Go back to first step when design either does not meet performance requirements or performance requirements change.
• Now reread every bullet in the preceding paragraph and substitute business for process. And every sentence is equally true. Only now you are operating at a higher level, one where processes are just one piece of the puzzle.

Why am I having trouble getting across the importance of business design to executives and academics? I think for two reasons: 1) they have trouble with critical thinking. They have been taught what to think and not how to think. They filter everything through what they have been taught and can not see other possibilities. This is reinforced by consulting companies who keep selling them the same processes (strategic planning for one) that continue not to work (which I can explain why rather easily). And 2) they have too much invested in the way they currently think to allow something new to come in. I have been especially disappointed in people I know and respect and have even studied under in their inability to consider what I have to say. They have been teaching the same ideas for years and have all of their case studies lined up for students to review, analyze and report. But the universities and colleges are supposed to be the heart of new ideas and creativity and what I am finding is a stone wall just as thick as those of the business world.

And I see some of that same resistance in several of the process groups.

My mode of transportation was my thumb.  I simply stuck it out where the driver of every car passing by could see it and waited for some kindred soul to stop and offer me a ride.  When I first experimented with hitch hiking I was very tentative about putting my thumb out.  I did not want to seem too aggressive nor did I want to impose myself upon the drivers.  So in my meekness I barely held my thumb away from my body and I never looked directly at the driver.  End result was   people were confused about what I was doing on the side of the road.  They thought I was waiting for a friend to pick me up or that I was loitering with nothing to do. 

After hours of disappointment I had the epiphany that I needed to put my thumb out where everyone could see it.  I needed them to know that I was asking for a ride and then let them decide if they wished to offer it or not. 

My thumb went out, I looked directly at drivers (not defiantly) and suddenly my success rate dramatically increased.  One of my trips from Pennsylvania to Lancaster, California took only three rides and 52 hours.  As one friend said:  “It takes longer to drive it than that”.  That trip held many interesting stories (accidentally setting a car on fire; being offered a large knife by someone who had been stabbed; being in a car chase around Albuquerque NM, and riding through the Mojave desert in the back of a pick up truck being driven by two cowboys).

Well here it is nearly 40 years later and I am ‘sticking my thumb’ back out and looking for opportunities.  Only now I am not looking for a car ride but instead I want speaking engagements.  My blog, my company’s website and my webinars on business design are all ways to make the public aware of ideas around the concept of business design.  And while writing can be effective I prefer to directly speak with people about it.  I want to speak with as many people as I can about the impact design has on the performance of their businesses or agencies.  They need to know that 80% of the time the performance issues facing their business are design-related.  Executives need to be reminded that the design of the business is their responsibility and they have to be shown how they can escape the business life/death cycle (Strategy Cycle).

If anyone reading this blog can point me to a speaking engagement I will be very grateful.  Business design is the key to change, not strategy, and I welcome the opportunity to speak about it.

I look forward to hearing from you.

Happy New Year

This should be an interesting year – globally.  We can see from the US bail outs how interdependent our companies and countries are so we may rise and fall together.  I am not particularly optimistic (short-term) because of the adversion to facing our problems head on.  We create artificial solutions which only buy us some time – in hopes that somehow things change enough to avert a complete melt down.  None of us want severe economic times but we will most likely have to experience more pain than we have thus far.  Bite the bullet and lets get on with recovery.