What is a business model and why does good strategy depend on it?
Sue (not her real name), a CEO of a not-for-profit organisation, asked me for assistance in developing a balanced scorecard to measure her organisation’s strategy and cascade it. Her organisation recently lost a fifty-year-old strategic partnership following the partner’s decision to integrate backwards. As a result of this change, there is much uncertainty amongst her team members despite having developed a strategy that is intended to transform the organisation.
In an inquiry session with Sue and her team, I sought to find out what the purpose of the organisation was. So, I asked the obvious question: what is the purpose of your organisation? In response, a team member read out to me the mission statement of the organisation. Noticing that they hadn’t quite understood my question, I decided to reframe it and asked the following questions: what unique value does your organisation bring to the world? What sets it apart and why, and to whom does it matter? As the team deliberated, I posed clarification questions and captured responses on a business model canvas. Though the canvas was incomplete at the end of the inquiry, the team made the following observations:
- The organisation offers a value that no one else offers within their market.
- How they perform their core activities or processes is significantly different from their former partner turned rival.
- The new strategy hasn’t taken into context the organisation’s business model and therefore has gaps.
- What is important to measure is easily identifiable once the business model is clear.
What really is a business model?
A business model describes how an organisation creates and delivers value to customers, and how it captures value for itself. It’s a story of how an organisation works. Whereas Alex Osterwalder, creator of the business model canvass, breaks the business model into a nine-part canvas, Allan Campbell, creator of the operating model canvas, enhances the business model canvas and organises the parts into four components:
- A customer model or customer value proposition that defines the value an organisation provides, for whom and how it delivers it.
- A financial model that explains how the enterprise generates revenues, and also the underlying economic logic for delivering value to customers.
- An operating model sometimes referred to as operations. This includes value chains (key processes), organisation model (people model and structure), Location (facilities, equipment and sites), information technology, and suppliers (and partners).
- A management system. This includes all managerial processes – the Board oversight, strategic planning, performance management, people review, budgeting, and quality management processes – that allow for the effective management of the customer, financial and operating models.
The enhanced business model canvas
Though the focus of Allan’s work is on designing operating models, incorporating his operating model canvas in Alex’s business model canvas gives an in-depth illustration of how different parts of an organisation work together to deliver value to customers. Designing a business model canvas is like an architect drawing a building. It requires critical thinking, and creativity.
Every organisation has a business model, whether deliberately designed or not. A high-performance organisation does not only have a business model that performs activities that are similar to rivals’ better but, one that also creates, delivers and captures values better than anyone else. Being better than anyone else means doing different activities from competitors or carrying out similar activities in different ways to provide better value to stakeholders.
Few organisations are deliberate in deciphering their business models into designs that align their activities around the value they want to create, and are easy to communicate to employees.
A good strategy should transform an organisation’s business model
Michael Porter, in “What is Strategy” states that “the essence of strategy is in the activities –choosing to perform activities differently or to perform different activities than rivals”. A strategy is about tailoring all the activities of an organisation to deliver unique value to customers. It is not about carrying out similar activities better than rivals, but it is about doing better by being different.
A strategy determines which activities a company should perform, how the configuration of individual activities should be and how the activities should relate to one another to deliver unique value. Developing a strategy that ensures sustainable profitability requires a good understanding of an organisation’s business model.
An organisation that invests in designing its business model in order to continuously analyse it for any constraints or conflicts, redesigns it to ensure it remains different and responds to environmental changes, will achieve superior sustainable performance.
A strategy designed without the context of a business model is not transformational. You must understand what you do, and then determine how to do it differently before you can meaningfully measure.
Porter M.E. (1996). What is Strategy? Harvard Business Review, Nov – Dec. https://hbr.org.
Ovans A. (2015). What is a Business Model, Jan. https://hbr.org.
Osterwalder A., Pigneur Y. (2000). Business Model Generation. Hoboken, NJ: J Wiley.
Campbell A. et al. (2017). Aligning operations and organizations with strategy. Operating Model Canvas. London: Van Haren Publishing.