Business models

The concept of business model is relatively recent, emerging in the 60’s and gaining greater attention in the 90’s and succeeding decades.  The different lines of thinking were subject of review in 2004 by Alex Osterwalder, who developed an ontology for understanding and expressing a business model. This ontology has provided the basis for development of a number of tools for expressing business models, the most well-known being Business Model Canvas.

This posting explores:

  • the concept and value of the business model as a key artefact in describing the architecture of an enterprise (AE)
  • potential areas for further development of this concept to provide greater utility

Key elements

Key elements of the business model ontology include:

  • Value proposition
  • Target customer
  • Distribution channel
  • Relationship
  • Value configuration
  • Capability
  • Partnership
  • Cost structure
  • Revenue model

Drivers

Looking at enterprises over the last 50 years, it is possible to see how their business models have moved from being quite static to quite dynamic. This has occurred as a result of the increasing rate of change in the business environment and internal organisation of capabilities.

A significant factor has been the increasing use of ICT in developing digital capabilities, complementary digital products / services and use of alternate digital channels.  This is evidenced in the increased attention given to business models in the dot.com era where digital channels became available as an alternative delivery mechanism.  It is also evident in the current business model disruption arising from effective use of ICT within the market in which enterprises operate, where digital services enable disaggregation of the value chain, opening up new points of competition for an enterprise.

Value

One of the key benefits of the business model is that it presents a model which encompasses both internal and external elements which underpin the viable operation of the intended enterprise.  Consideration of:

  • value proposition, target customer, channels and relationship give attention to factors underpinning the revenue / income model and the balancing of stakeholder value with income
  • value configuration, capability, and partnership give due attention to factors underpinning the expenditure / cost structure

Review and validation of the business model gives attention to the viability of the enterprise and provides a suitable foundation for development of the supporting operating model.

I am encountering an increasing number of situations where enterprises are finding it necessary and valuable to revisit the viability of their current business model(s), demanding that they change in order to remain viable.  In one case, a review of a transformation program led to identifying deficiencies in their intended operating model, which led to identifying deficiencies in their intended business model.  Their failure to recognise and address the business model issues has led to the failure of the enterprise (going into administration last year).

Attention to the business model gives cause to consider the fundamentals underlying the market strategy for an enterprise and the corporate / development strategy for an enterprise.  Developing a transformation program for a flawed business model is a recipe for disaster and for wasting valuable change investment, both personal effort, energy and enthusiasm as well as financial.  Attention to the business model also gives cause to consider the balance between changes to the market strategy versus development strategy.

Developments

There are two areas of development that I see occurring:

  • viewing the external environment in systems terms ie as an ecosystem
  • viewing the internal elements in systems terms

In the past, there has been a tendency to consider entities in the external environment relatively independently.  With increasing market disruption, viewing the market as the containing system gives recognition to interactions occurring in the market that have implications for an enterprise that were not previously considered because the interactions were not directly with the enterprise.

From what I have seen, the use of tools such as Business Model Canvas prompt consideration of the various internal elements of an enterprise, but this does not require the elements to be considered through a systems view, recognising that there are interactions which require consideration of the “whole” and not just the parts.

In bringing a systems perspective, this also introduces the opportunity to apply:

  • elements of systems thinking to the enterprise
  • the Viable Systems Model to the enterprise
  • business model thinking in a fractal manner to subsystems within the enterprise

Practical application

It is probably worth adding that I have found that thinking about and exploring the business model of various enterprises has been helpful, whether or not I am engaged in developing the architecture of the enterprise.  Cases in point include:

  • LinkedIn Groups – considering the business model for LinkedIn to provide context and understanding of the role and contribution of LinkedIn Groups when it is not a direct part of the revenue model for LinkedIn
  • My state of South Australia and nation of Australia – thinking about how we are positioned in the global context, what capabilities we have or need, etc, including contribution to a group which considered the “innovation system” within our nation, and another interested in “reinventing our nation”
  • Voluntary collaborations in which I have been a member and contributor, helping the group to think about its goals and aspirations, the outcomes it is seeking (value propositions), the capabilities the collaboration needs and the areas to which we need to give priority

 

I have elaborated further on business models in a more recent article – Exploring business models.

 

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