Editor's Note: This article is featured in the 2001 Resource Guide, a supplement to the December issue of DM Review.
Within the corporate organization, information technology (IT) is playing a key role in an economic expansion unprecedented in the modern age. IT systems have delivered major cost savings and have offered new insights into corporate operations. Yet, while corporations employ a wide array of technologies and business process techniques to control costs and increase the bottom line, very few companies formally capture, manage, leverage and communicate their business model the very heart of their go-to-market strategy and performance analysis framework. This is due in large part to the fact that IT development has focused on data modeling and business process modeling. Companies quite simply lack sophisticated technology for business model management. Another reason companies don't engage in business model management is their failure to realize that they need to do it or a mistaken belief that they are already doing it. While it is true that in the past companies could adequately manage their business model using best-available practices, that day is passing. Faced with unrelenting competition from traditional competitors and new competitors leveraging technologies such as the Internet as well as the pressure from Wall Street, businesses must reinvent themselves or invent new business models. In this environment, the need for accurate, context-based and comprehensive decision making is paramount, and such decision making depends on effective management of the business model.
Figure 1: Interfunctional Relationships in a Business Model
What is the Business Model?
The business model can be defined as the sum of how the organization does business (how it is organized, what it sells, how it delivers products and services, how it adds value) and the business management rules governing its strategy, plus how it wants to measure the performance of the business.
A company's business model consists of every business function and all the interfunctional relationships in that company.
The business model also includes the enterprise's sub-models, such as the financial model, organization model, sales model, customer model, product model, distribution model, logistics model, etc., and the many-fold relationships and interactions between each of these models or between components within each of these models. These relationships are the business management rules that capture how one or more models impact each other. An example of a relationship is the simple business management rule "Our insurance products can only be sold in particular territories (due to licensing restrictions)."
The straightforward task of capturing the business model and providing business executives with a visual view would significantly enhance business understanding. The ability to communicate the business model efficiently and accurately to all corporate constituents puts everyone in the company on the same page. This improved company-wide understanding of the business model the business itself forms the foundation for sophisticated and relevant decision making the tool for accomplishing corporate objectives. A comprehensive business model management initiative can enable opportunities that directly and positively impact the corporate bottom line.
Evolution of Enterprise Applications
The evolution of enterprise applications explains why business model management has been neglected and, at the same time, illustrates how businesses have been brought to awareness of the need for business model management.
Enterprise applications as packaged solutions arose as a way to bring greater efficiencies than the customized applications first implemented to reduce business costs through the use of IT. The corporate goal was to streamline the processes across the traditional stovepipe custom applications. Separate groups of enterprise applications emerged, focused on either the cost side (e.g., enterprise resource planning application systems) or the revenue side (e.g., sales force automation application systems) of the business model. In both cases, the goal was to reduce costs through data integration, utilizing the underlying technology of data modeling. These systems have been constructed principally by coupling a data model and the business operations rules of the organization (as opposed to its business management rules). The business model is only implicitly injected into these applications when components of the business model are captured during the business requirements discovery phase of the project. The gathering of business requirements is dominated by the need to capture business processes with their own business rules. Moreover, whenever any business model component is captured, it is always limited to the current, or as-is, state of the business. During implementation, the business model as such is buried, generally within the application code or as a part of the data model. Examples of embedded business model components are: What products do we sell? and What are our distribution channels? In essence, enterprise models are not driven by the business model; they are data model-driven.
Furthermore, in enterprise applications the business model is fragmented across heterogeneous systems which utilize incompatible formats for representing business model information, resulting in little, if any, ability for those systems to communicate and interoperate from a perspective of shared business model. Thus, although they provide well-understood efficiencies and cost reductions, enterprise applications, in fact, limit the corporation's ability to understand and communicate its core value proposition: the business model.
Business Process Modeling
Vendors of enterprise resource planning (ERP), sales force automation (SFA) and similar applications and their corporate customers recognized that the integration of functionally different enterprise application components could bring significant reductions in cost. The solution was to translate the business model from the perspective of one corporate function to that of another corporate function (e.g., human resources to finance, finance to manufacturing). The hope was that business process integration across functions would allow for the ease of transition from one corporate function to another, thus streamlining operations. Organizations have invested large sums of money and resources to bring efficiencies to their operations through this kind of process integration. However, because most business process integration is undertaken within the confines of a single application, or a set of applications from a single vendor, it remains limited by that application or set and by the fact that the foundation of such integration remains data modeling. As a consequence, while these solutions succeed in integrating the data of two or more corporate functions, they achieve only a partial integration of the business processes of those functions.
Figure 2: Sales Model
Corporations have also had to accept a piecemeal approach to systemizing such initiatives as customer call centers, logistics management and marketing. The only choices open to them are multiple vendors and multiple solutions, each focused on a single initiative. The result has been a further proliferation of nonintegrated systems. Enterprise application integration (EAI) software solutions have been created in an effort to solve this lack of integration. Driven by the need to make supply chain processes more efficient and the opportunity to utilize the Internet as a communications vehicle, EAI has evolved into B2B application solutions. EAI focuses on data integration, while B2B solutions leverage the technology of business process modeling to effect business process integration across dissimilar applications and across enterprises.
While enterprise applications such as ERP and SFA were developed as part of an effort to reduce corporate costs, a parallel group of applications emerged to improve analysis and understanding of corporate performance. These applications also began as customized components and have evolved into the packaged business intelligence (BI) solutions we know today. BI applications help corporate executives to understand the historical performance of corporate operations (e.g., Who were my top ten customers last quarter?). A few attempt to predict the future by projecting historical performance.
The need to leverage historical performance to predict near-term performance or consumer behavior is leading vendors to deliver solutions where BI is closely integrated with specific customer-focused enterprise applications and processes. An example of an extended BI solution is customer relationship management (CRM). The CRM industry is currently segmenting and fragmenting to address different aspects of closed-loop relationship management such as channel partner relationship management and supplier relationship management. Driven by the Internet, CRM solutions focus on affecting the revenue side of the value equation through micro-management and micro-actions. But these solutions are inadequate because micro-management cannot deliver sustainable revenue opportunities.
What is the value of business performance analysis if it cannot be converted to future actions? How can initiatives such as CRM deliver sustainable growth? What is needed is the ability to analyze in the context of the business model and then make changes to the business model. These model-driven business changes or actions can deliver sustainable revenue growth.
Enterprise Business Model (EBM) Management
Today the increased size and complexity of corporations and the rapidity and radical nature of business change make effective business model management imperative.
Figure 3: Business Model-Driven Enterprise Model
Change is the order of the day. According to McKinsey and Company, to deliver on a sustainable growth strategy, established enterprises must constantly change along a continuum on which they first defend their core business, then generate a steady pipeline of new emerging businesses and, finally, develop new business and market ideas. The third phase gives rise to its own continuum, a reverse of the first, with new business ideas evolving to emerging businesses and finally to a core business.
Similarly, brand new enterprises, to be successful, must also evolve through the continuum from ideas to an emerging state and then to building a core defensible business. In the McKinsey model, the one constant is an ever-changing business model. A company that chooses to undertake business model management will enable its executive management to effectively make and track the changes required for sustainable growth.
Internet technologies are another source of rapid and disruptive changes in the business models of most organizations. It is imperative today that each organization have a clear, detailed and formal understanding of its business model in order to manage and control changes in its business.
Corporate complexity and rapid change increase the information gap between what a business actually is and what it is perceived to be by its constituents. Business model management closes this gap.
Business model management also comes into play when determining corporate profitability. An organization's performance can be measured applying a variety of methods and tools. Every method and tool approaches the measurement of performance using a single, simple, yet sophisticated premise: corporate profitability the relationship of the organization's revenues to its costs.
Profitability is also the accepted point for valuation analysis of each component of the organization's revenue and cost items. The performance analysis must be in the context of the organization's business model to ensure that:
- The analysis is fair in relationship to its stated objectives and strategy i.e., its business model; and
- The analysis will lead to actionable items which, to be meaningful, must be translatable into changes in the business model.
The story of many Internet dot-coms illustrates what happens when a company fails to keep its focus on profitability. It is very interesting that once highly regarded Internet commerce start-ups have failed or are now seen as failing or soon-to-fail businesses. Although it is recognized that they are struggling, very few people understand the reason for this struggle. Tom Davenport (CIO, June 1, 2000) states that the Internet business model of these start-ups is, "We can have our cake and eat it too." The Internet is viewed as such a powerful tool that basic business model principles such as the rule that choices or strategies in the same business unit must not conflict are viewed as unnecessary. When an Internet start-up fails, it may well be that its business model was incomplete or not fully expressed and captured, leading to inaccurate and incomplete understanding of the business.
The business model context is also essential when analyzing alternative business models or business model variations when changes in business objectives and strategies are contemplated as well as when benchmarking to peer organizations and industries.
The need to formally model the business has never been more essential. A complete, end-to-end perspective of an organization's value is more clearly understood if viewed from the context of a complete, end-to-end business model. By actively managing the business model over time, a true contextual perspective of the value equation (cost vs. revenue) can be analyzed and understood; and changes made to such a model will deliver sustainable profit opportunities.
Previous attempts to accomplish an end-to-end perspective, fell short due to the realities of the marketplace and the business environment. Multi-vendor solutions, a market reality, had no single end-to-end definition of the business model incorporated in each solution. Moreover, they did not account for the business environment reality of constant, rapid change in the business model over time.
The efficient way to gain an understanding of end-to-end valuation and profitability is to have an enterprise facility that can represent the company (a formal business model) from the perspective of all the unique sub-models stored within each of the enterprise applications.
For instance, the CRM applications maintain information related to customer model (demographics, order frequency, order history, products, promotion information, etc.). The supply chain applications maintain information related to logistics model (suppliers, raw materials transformation and cost of goods sold). A brokered/ translated combination of business model information from both the CRM (demand chain) and logistics (supply chain) applications when related to the financial model would establish a clear picture of end-to-end profitability.
The Need for EBM Management Applications
IT has now evolved to the point where it can provide what organizations so clearly need a new class of enterprise application, an enterprise business model management (EBM) facility. EBM applications are self-contained business model management facilities that provide the following capabilities:
- Business Model Capture: The ability to extract business model information from existing enterprise applications and formally capture and codify it. Alternatively, provide a vehicle for systematic manual capture of the business model.
- Business Model Communication: The ability to communicate time variant versions of the business model, both in business and technical terms, to all stakeholders within and outside the organization.
- Business Model Change Management: The ability for business users to alter and track the business model over time, either selectively or in toto, with additional capabilities such as version control and audit trail.
- Business Model Brokering: The ability to communicate, exchange and synchronize the business model across multiple application domains in both intra- and extra-enterprise environments.
The benefits of an EBM management facility include:
- A formal way to define and codify the company's full go- to-market and business performance analysis enterprise business model.
- An audited way to document and communicate the company's core competencies and best practices as they evolve over time, enabling current and retrospective business analysis within an accurate business model context.
- An ability to project the company's core competencies and best practices, accounting for business change, into the future with a perspective of being able to analyze multiple future alternatives.
- Improving the rate at which enterprise applications can respond to the company's rapidly changing business environment.
- Providing the business user with the capability to directly effect business changes by taking control of the business model's change management processes.
- Improving the speed at which enterprise application can be developed while reducing the cost of business model discovery.
- Enabling the transition from one vendor's enterprise application to another's by brokering (exchanging) business model information between two proprietary formats, greatly reducing the cost, time and complexity of such transitions.
- Supporting rapid business performance analysis within the context of the business model, a process called action-ready analytics, thus creating a shorter feedback loop to change the business.
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