What is a Business Model and how is it relevant?
In modern Design Thinking, a close evaluation of end users, their activities and the context of their work is at the heart of analysis and synthesis (sometimes referred to as the “empathize” and “define” steps).
Often overlooked, however, is the full business context – the purposes, goals and operating environment to which the work of constituents is directed. In fact, business thinking can be inadvertently and incorrectly perceived as counter to design thinking principles.
Instead, thorough business thinking and rigorous analysis and synthesis should provide key sources of insight for solution designers.
Such activities involve examining the business as a logical operating entity in order to appreciate the work that is done, and why. Common techniques cited in design literature are value chain analysis, business model analysis and mind mapping.
The practical details, however, of these analytic techniques can be elusive – the “how do you do that in practice”. For example, what exactly is a business model and how can it be applied in the use of design?
Our search for answers through the web, textbooks and courses came up short. We couldn’t find a clear answer to this question.
A January 2015 article in the Harvard Business Review entitled “What is a Business Model?” cited Michael Lewis’s The New, New Thing. He describes a business model as “a term of art”, that is “hard to define, but recognized when seen”. Lewis then cuts to the chase: “All it really meant was how you planned to make money.”
HBR then focuses on something more substantive, citing Harvard Business School’s Joan Magretta, who connects the idea of business models to the concept of value chain. The article further characterizes her thinking as follows: “a business model is a description of how your business runs”. An articulation of these ideas could be useful from a solution designer’s perspective.
Making it real
We decided to dig more deeply for something we can use – something logically rational, detailed and complete. We started by gleaning elemental ideas from literature, leading us to characterize a business model as comprising some or all of the following elements:
- Business purpose and sought-after value
- A logical structure for value creation realized through a sequence of major activities and the resulting outputs
- Relevant constituents and expected impacts, behavioral changes and benefits to them
- Relationships and interactions among constituents and organizations
- Enabling capabilities that support value creation (e.g., knowledge, systems, procedures)
- Factors, often in regards to people, that have to be managed to sustain the model
- How success is measured
What we find useful about this list is the practicality of it – less abstract, more complete in information, grounded in strategy and more applicable to the work of design. These are ideas that we can hunt for with our clients and document in our consulting work products. Then we have a foundation of knowledge regarding the business and its operations that can be used as a starting place for “envisioning” a solution and capabilities.
This knowledge can also serve as a source for innovation as the design team explores new ideas for enabling elements of the model. For example, deploying online social capabilities in support of a specific knowledge sharing capability essential to the business model.
This approach also liberates us from living solely in business strategy at the higher levels (e.g., corporate or business unit). It can be applied to functional areas, groups of functional areas and even programs – the space in which our solutions often inhabit.
Illustrating the concept
Below is the summary illustration of a business model developed for a client project, involving a core corporate function (enterprise risk management) – our actual work product includes greater detail. The model defines how the core work activities in this domain and the interactions between parties work together to create value.
Supporting these activities are the underlying “program enablers”. Also identified are program management levers that must be managed to achieve success (a/k/a “critical success factors”).
On the periphery, external environmental factors and the current and future (assumed) ecosystem provide further context. Finally, the desired business outcomes are identified, which can specify people behaviors the solution should seek to drive.
Therefore, rationalized and fairly complete knowledge of the essentials of operations is documented, their relationships are defined, and their alignment to strategic goals is made clear.
First, this sort of work product raises the baseline of analysis and understanding from the mediocrity of an unstructured informational summary of business strategy and operations to a rationalized view of the business that is rich in relationships and enablers.
Second, this kind of analysis can directly inform solution requirements. For example, the solution may incorporate and facilitate elements of model, such as the logical sequence of work. Furthermore, we can connect big ideas of the business model to big ideas of the solution model (not defined in this article). For example, key enablers of the business model are potentially the source of ideas for core capabilities (requirements) of a solution: facilitating processes, supporting key roles, providing essential knowledge and delivering training.
Finally, the desired outcomes of such a model are a source of goals for innovation and for driving exploration of user perspectives and needs – helping us to know what to explore.
All of this leads to the following notional sequence of analysis and synthesis driving solutions:
First: Current state assessment and business / functional strategy clarification
Second: Business model articulation (the topic of this blog post)
Third: Business design and innovation (see a prior blog post on this topic)
Fourth: Solution design and innovation.