BUSINESS MODEL CONTENT

BUSINESS MODEL CONTENT

Developing the Business Model Content

As previously mentioned, the business model is a tool that helps the industrial engineer develop an understanding of the effectiveness of the design and management of the enterprise’s business, as well as the critical performance-related issues it faces, to evaluate opportunities and manage risk better. When completed, the business model is a strategic-systems decision frame that describes (a) the interlinking activities carried out within a business entity, (b) the external forces that bear upon the entity, and (c) the business relationships with persons and other organizations outside of the entity.

In the initial stage of developing the business model, pertinent background information is gathered to gain a full understanding of the industry structure, profitability, and operating environment. This industry background information and preliminary analysis then is used to determine the impact on the enterprise’s business. Each of the elements of the business model provides a summary of infor- mation that is pertinent to developing an understanding of the competitive environment and the enterprise’s relative strengths and weaknesses in the marketplace.

The processes the engineer uses to assimilate the acquired knowledge will be unique for each enterprise and each engineer and therefore cannot and should not be reduced to highly structured formats, such as templates, checklists, and mathematical models.

A thorough understanding of five key business principles—strategic analysis, business process analysis, business measurement, risk management, and continuous improvement—will be necessary as the engineer seeks to acquire knowledge about the company’s business and industry for the purpose of developing the full business model. These business principles and their interrelationships are depicted in Figure 2.

Throughout the model-building process, the engineer is working toward the ultimate goal of integrating the knowledge he or she obtains about the enterprise’s systems dynamics and the con- gruence between strategy and the environment. He or she may use mental processes or more formal business simulation and systems thinking tools, or some combination of both, to structure his or her thinking about the dynamics of the enterprise’s strategic systems.

Model Element 1: External Forces and Agents

External forces and agents encompass the environment in which an enterprise operates. They are the forces that shape the enterprise’s competitive marketplace and provide new opportunities, as well as areas of risk to be managed.

Continuous monitoring and assessment of external forces is critical to the future of any business. The environment plays a critical role in shaping the destinies of entire industries, as well as those of individual enterprises. Perhaps the most basic tenet of strategic management is that managers must adjust their strategies to reflect the environment in which their businesses operate.

To begin understanding what makes a successful business, one must first consider the environment in which the enterprise operates and the alignment of its strategy with that environment. ‘‘Environ- ment’’ covers a lot of territory—essentially everything outside the organization’s control. The analysis of external forces and agents includes an assessment of both the general environment and the com- petitive environment. To be practical, one must focus attention on those parts of the general and competitive environments that will most affect the business. Figure 3 provides an example of a framework that can be used in assessing the general environment.

The general environment consists of factors external to the industry that may have a significant impact on the enterprise’s strategies. These factors often overlap, and developments in one area may influence those in another. The general environment usually holds both opportunities for and threats to expansion.

The competitive environment, generally referred to as the ‘‘industry environment,’’ is the situation facing an organization within its specific competitive arena. The competitive environment combines

forces that are particularly relevant to an enterprise’s strategy, including competitors (existing and potential), customers, and suppliers. The five forces model developed by Michael Porter, probably the most commonly utilized analytical tool for examining the competitive environment, broadens thinking about how forces in the competitive environment shape strategies and affect performance. Figure 4 is a graphic depiction of the five basic forces.

Model Element 2: Markets

Understanding the markets in which the enterprise competes is critical in developing the knowledge base for the business model. The extent to which an enterprise concentrates on a narrowly defined niche or segment of the market is referred to as focus. The engineer should understand the relevant advantages and disadvantages of particular levels of focus in terms of their impact on competitive advantage. For example, a differentiation strategy is often associated with focusing on a narrowly defined market niche. In contrast, a cost leadership strategy is often associated with a broadly defined target market.

Markets are not static—they emerge, grow, mature, and decline. As a market moves from one life cycle stage to another, changes occur in its strategic considerations, from innovation rates to customer price-sensitivity to intensity of competitive rivalry and beyond. The market life cycle pro- vides a useful framework for studying markets and their impact on the enterprise’s value proposition.

Model Element 3: Business Processes

In the enterprise, work gets done through a complex network of business processes. Work processes are the vehicles of business life. If properly configured and aligned and if properly coordinated by an integrated set of goals and measures, they produce a constant flow of value creation.

Process view of the business involves elements of structure, focus, measurement, ownership, and customers. A process is a set of activities designed to produce a specified output for a particular customer or market. It implies a strong emphasis on how work is done rather than what is done. Thus, a process is a structured set of work activities with clearly defined inputs and outputs. Under- standing the structural elements of the process is key to understanding workflow, measuring process performance, and recommending process improvements.

Model Element 4: Alliances and Relationships

Financial pressures and time constraints continually squeeze managers who do not have the resources to fill the resource gaps through internal development. Acquisitions have not always been the most effective way to fill these resource gaps. They have proved expensive and brought not only the capabilities needed, but also many that were not desired. As a result, an increasing number of global enterprises recognize that strategic alliances can provide growth at a fraction of the cost of going it alone. In addition to sharing risks and investment, a well-structured, well-managed approach to al- liance formation can support other goals, such as quality and productivity improvement. Alliances provide a way for organizations to leverage resources.

The rapid emergence of strategic collaborations as alternatives to the usual go-it-alone entrepre- neurial ventures is evident everywhere, from the growing collaborative efforts of large multinationals to the continuing use of alliances to help maintain competitive advantage.

Model Element 5: Core Products and Services

Intense global competition, rapid technological change, and shifting patterns of world market oppor- tunities compel firms to develop new products and services continually. Superior and differentiated products—those that deliver unique benefits and superior value to the customer—are the key to business success. Understanding the enterprise’s core products and services and the value they bring to the customer is essential in developing a business model.

The importance and benefits of measuring new product success and failure cannot be overstated. Measuring new product performance has several benefits. Measurement (a) facilitates organizational learning and process improvements, (b) fulfills the need for consensus on new product outcomes and determinants, and (c) leads to observable benefits, such as improved cycle times, improved new product success rates, and an enhanced ability to assess changes to the new product development process.

Model Element 6: Customers

An organization cannot survive and prosper in today’s world without customers. Customers allow organizations to exist, and yet customer capital is a mismanaged intangible asset. In many cases, companies are providing the wrong products and services for the markets they serve. Such organi- zations focus on pushing products onto the customer, rather than involving the customer in the design and development activities. Only mismanagement of customer capital can explain why U.S. com- panies, on average, lose half their customers every five years.

In a knowledge economy, information is more valuable than ever, and generally speaking, cus- tomers have more knowledge than the enterprise. As information and the economic power it conveys move downstream, it is vital that businesses manage customer relationships in new ways. Enterprises that learn with their customers, simultaneously teaching them and learning from them, form depend- encies with them. Their people and systems—human and structural capital—mesh better than before.

Understanding the power of the enterprise’s customers, their needs and expectations, and the manner in which they are integrated into the enterprise’s value proposition is critical in developing a knowledge-based business model.

Summary

Figure 5 provides an example of the major elements of a hypothetical retail company’s business model. Each of the six business model elements is discussed more fully in the following sections.