One more time, what is a business model?
A recent HBR article “A New Framework for Business Models” by Mark W. Johnson had me hopeful as I began reading and shaking my head as I finished. Within about two pages, Mr. Johnson falls into the very trap he’s trying to solve: presenting a ‘new business model’ framework that strikes a balance between what he calls the overly reductionist approach (citing Peter Drucker) and the overly complex (“everything-in-your-value-chain”) approach. What he presents is neither new nor very balanced.
I was hopeful for a new idea. Over my collective years of experience, first as a corporate executive and now as a consultant, I’ve often confronted this question: What is a business model? I agree with Mr. Johnson, the term gets thrown around a lot and is poorly defined and understood. Where I part with him is his approach.
He presents what he calls a four box framework. But it’s actually 3 questions. No, wait. Not that simple. When you explore the questions – the very first one adds in the concept of a customer value proposition that is really several additional questions rolled into a long definition. Then the second question actually has four parts – I guess all the answers are minor or related because they all go into box number two. And the third question, he warns you in a clever aside, actually has two parts. I guess they are the resources and processes, and each, bearing a certain level of importance in his model gets its own box. Lucky resources and process. The questions are okay, but definitely not new. Trying to fit 9+ ideas into four boxes so you can say you have a ‘new framework’ is a sad reminder of the things consultants do that at best make us look silly and worst, give the profession a bad name. Sorry, Mr. Johnson – I think you really were trying to do a good thing. Your approach, as written, just didn’t do it.
So putting myself in your, the reader's, perspective, I’m thinking: ‘Okay smarty, give us a better approach to defining a business model in a useful way?’ Here goes:
First, accept Peter Drucker’s definition as a great starting place. Doing otherwise is like telling Warren Buffet he needs a few more years of experience and results to qualify any investment advice he provides. Drucker’s definition as Mr. Johnson states is: "A business model is nothing else than a representation of how an organization makes (or intends to make) money." That is the definition. You can wordsmith if you want, but that is the essence of it. Whether you take 3 questions, 20 questions, 100 data points or a 1000 to shape that generic definition into your own unique business model depends on your need for clarity and precision. Some organizations can do this in a page. Others for cultural, demographic, or other legitimate reasons need to fill in more blanks. Forcing everyone into a simplistic model has little or no value.
Second, accept that there are some great – tried and true – questions that can guide you. Yikes – I’m going to name four. You can ‘box’ your responses if you want. If you’re more visual – draw pictures. Or, if you’re more of a prose person – wax on. The key is get as specific as you can about the answers.
What problems do you (want to) solve? Not what products (services) you offer. Those may and likely should change over time, but the base problems you are in business to solve should be rooted in your very mission – your organizational core. If you stay focused on the problems solved, products and services and methods become options for you to embrace or discard as you build out your business model.
What position do you want to occupy in the marketplace? This can be asked and answered in many ways. However, the key to having the most effective business model possible rests in the way you decide which customers, which segments, which common or differentiation strategies will allow you to distinguish yourself and capture the part of the market you are best suited to serve.
What make you unique? Could be that your organization is not unique and commoditization is the path for your organization. That could also be a great answer or a terrible one. If you’re feeling commoditized and you have many ‘value’ elements in your performance chain – chances are highly likely that your business model is out of sync with your chosen market success requirements. If you have something that is truly unique but are finding price pressure, it means something in your business model is not generating the uniqueness you profess. Spend time – dig out the data – be honest about what is or is not unique about your company today. Not everything has to be unique – only those real differentiators. Once you have diagnosed your current operations, you can decide the actions that will bring your business model into alignment with your market intensions.
How do you make money? This is the sharp point on the end of Peter Drucker’s definition. Your answer might be as simple as ‘By the pound.’ ‘By the hour.’ ‘By the piece.’ ‘By the inch.’ ‘By the negotiated contract.’ By... Or it may take a more complicated answer – such as Jim Collins in Good to Great pushes for with his query “What drives your economic engine?” Your business model may require something more than the simple pricing mechanism answer. You will likely need to detail the source of your revenue potential and translate it to value in a way customers can understand.
Third and finally, accept that your business model only works if the receivers ‘get it.’ For your customers, company leaders, employees, shareholders, or other constituents to understand your business model and effectively act on it – they need to receive it in ways that works for them. That may mean boxes, pictures, sentences, symbols, metaphors...and those are good things. Not bad. If you have a pretty model that is devoid of the details and truths of your operations, no one is served. If you’re rigid about the form or framework, you may lose some of the most interesting things about your real business model. You may need a lot of detail for some audiences and need to bring it up a level or three for others.
That is why in the end as in the beginning, I bow to Peter Drucker. His definition is not about reducing the concept of a business model. His definition gives you all the room you need to expand on your answer in any way that works for you and your organization.
About the author:
Chris LaVictoire Mahai has more than 20 years of experience in leading, developing, and implementing business and marketplace strategies. Learn more about Chris.
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