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A business model is a simple representation of the complex reality of a business. The primary purpose of a business model is to communicate something about the business to other people: employees, customers, partners, or suppliers. This chapter answers the two questions modelers face most often: what is a business model and why create one?
What is a model? A model is a simple representation of a complex reality that serves a particular purpose. We use many models in our day-to-day life: street maps, television schedules, 12-step programs, and furniture assembly instructions. We use models all the time without thinking about them.
Consider an example. You and a colleague fly to Washington, DC, to visit a restaurant. You aren't there to eat; instead your employer is considering buying the restaurant—and the four others owned by the same company, Cora Group—and your job is to evaluate the place and offer a recommendation. The restaurant is called Portia, and it is downtown. Since neither you nor your colleague know Washington, you pick up a map as you rent your car. As your colleague drives, you interpret the map and guide her, telling her when to exit the highway and where to turn on the streets and thoroughfares.
Your map is a model. It is a simple representation of the complex reality of the city. It omits the smaller roads, the sidewalks and bike paths, the streams and electrical lines, the houses and shopping malls, the gas stations and office towers. It has just the few things you need to find your destination: the highways and major streets.
This model is built for a purpose: to find a destination while driving. If you were bicycling, you would use a different map, a model that showed the bike paths and bicycle-friendly streets. You would use a different map if you were taking mass transit, one that showed the train stations and bus routes. And if you were digging up the street to lay fiber optic cable, you would carry yet a different map, a model with the locations of the gas and power lines, existing communication cables, water and sewer pipes, and everything else you might find underground. For the same territory, different purposes require different models.
Perhaps your rental car includes a navigation system. Inside the navigation system is the same kind of model of the city's road network, functionally similar to the printed street map. But instead of you reading the model and deciding where to go, the software interprets the model as your colleague drives, telling her when to turn right and how far you are from your destination. Models can be interpreted by people or they can be interpreted by software. Often a single model is built for interpretation by both people and software.
Just as a street map is a model of the far more complex reality of a city, a business model is a simple representation of the always far more complex business. A business process model is a business model, showing who does what work and in what sequence. A business organization model is a business model, showing how different people and organizations interact with each other.
The art of building these business models is called business modeling. This book is about that art, about how to create business models and how to solve problems using business models.
But first we must disambiguate. Sometimes when people talk about the business model of an enterprise, they are talking about something different from what we mean in this book. When they say "business model" they mean what the business sells. For example, "the business model of Google is selling advertising" means that Google makes its money by selling ads, not by selling automobiles or long distance telephony.
We mean something different. In this book the term "business model" is not just shorthand for what a company sells. Instead when we say "business model" we mean a model that describes the details of a business: its goals, organizations, business processes, or business rules.
THE RISE OF BUSINESS MODELING
Engineers use engineering models and have done so for many years. Every bridge, car, aircraft, and integrated circuit is created using models. Models are created to communicate with customers, to show how the product will look. Models are used to communicate with the engineer's managers to illustrate issues that need management attention. Models are used to communicate between engineers with different responsibilities—for example, to plan how the electronics in an aircraft are to be powered. In engineering, models are ubiquitous.
Software engineering is a newer engineering discipline, and the use of modeling in software is more recent. Starting in the 1980s, some visionaries realized the value of software modeling. Many different modeling languages and methods were developed. Some of these languages and methods had followings, but none had mass usage. In the 1990s market demand increased, and Rational Software Corporation initiated the development of the Unified Modeling Language (UML), an attempt to unify the various modeling languages and methods. In 1997, Object Management Group adopted UML as a standard. UML is now widely used to design applications and systems. The use of UML is a mainstream practice for software engineers today.
Historically, business modeling has seen much more limited use. Of course, organizational charts and accounting models have been used since antiquity, but other than these two exceptions, business modeling has been rare until recent years. Until recently, businesspeople communicated using words, spreadsheets, and presentations, not business models.
Now this is changing. Businesspeople are increasingly using models to communicate. Over the last fifteen years, increasing numbers of people have built business models: models of the business processes of their organization, the goals and strategies, or the policies and rules.
We are seeing a progression from proprietary models and tools to new standards, the same kind of progression that occurred in software modeling in the 1990s. Business modeling is still a niche, but it is growing rapidly. In ten years, we expect business modeling to be mainstream, to be the natural and ordinary way for businesspeople to communicate, much as software modeling is mainstream today for software engineers.
How does a technology such as business modeling become mainstream? What steps does it go through on its path to widespread use? Geoffrey Moore [Moore 1991] describes a technology adoption lifecycle, a depiction of how technologies progress from their inception to wide adoption and use. The technology adoption lifecycle describes who adopts a new technology as the technology develops. Initially a new technology is promising but rough around the edges. It is only adopted by innovators—people who experiment with new technologies, shape them, and improve them. As the technology improves, it is adopted by early adopters, who use a new technology to achieve a competitive advantage before the technology is solid or complete. Once a technology is mature enough, it is adopted by the early majority, a large group of people who welcome new technology once it is mature. After the early majority comes the late majority, who will only use a technology after it is widely adopted by others. Finally there are the laggards who are skeptical and only adopt a technology when they feel the large costs of being left behind.
The technology adoption lifecycle is a good framework for understanding the rise of business modeling, just as it was a good framework for the rise of software modeling in the 1990s. As shown in Figure 1.1, software modeling has penetrated much of the market now and is well into the early majority stage. The market penetration of business modeling is still early. Business modeling will go from a rapidly growing niche activity to a rapidly growing mainstream activity.
What's driving the growth of business modeling? Why is it changing from a small niche activity into an increasingly mainstream technology? There are several drivers for the growth of business modeling. One driver is the changing economics of corporate information technology. As information technology (IT) budgets decline, IT organizations are using business models to align IT initiatives with business needs.
BUSINESS MODELING AND IT ALIGNMENT
In the late 1990s money flowed freely to corporate IT organizations. Companies raced to develop new applications, to integrate their existing applications and make them available on the Web, and to prepare their legacy applications against the risks of Y2K. Businesses competed in terms of how much they spent for IT, believing that every dollar spent would lead to competitive advantage and increased productivity. Wall Street analysts cheered them on, reporting the latest IT progress of the companies they covered.
Those days of exuberance have long passed. Since 2000, IT organizations have suffered declining budgets. Businesses now compete in terms of how little they spend for IT, preferring to direct their dollars other purposes: new business development, acquisitions, or stock dividends. Every IT expenditure must be carefully justified with the business benefit created by the expenditure.
Since 2001, we have helped corporate IT organizations use business modeling as a way to justify their IT expenditures. Using business models, they have connected the details of their desired IT spending with their business goals, business processes, and business rules. They have used business models to communicate the value of their IT plans. They have used business models to ensure alignment of those plans with their business needs.
BUSINESS MODELING AND BUSINESS TRANSFORMATION
Outside the cubicle farms of IT is the larger business that IT supports. During the last ten years, businessees have employed business modeling independent of the IT organization, for their own reasons. One reason is business transformation. Business transformations have become more common since 1995. Business models make those business transformations easier to manage.
Forty years ago, most businesses changed slowly. Martin Mayer [Mayer 1997] tells a story from the early 1970s of a retiring banker who was asked to name the most important business change he had seen in his career. His answer? Air conditioning. From today's perspective, this story seems quaint, a picture of another, simpler (albeit sweatier) time.
Today, business transformations are common. Business transformations include changes of control: mergers, acquisitions, divestitures, and leveraged buyouts. Business transformations include changes of sourcing: outsourcing, offshoring, and many varieties of corporate teaming. Business transformations include changes in strategy and business process. And many businesses reorganize their reporting relationships and organizational responsibilities once or twice each year.
Business transformations are notoriously hard to manage. As a result, many transformations fail. For example, several banks merge, but many mistakes are made in the merger integration. Even years later the resulting bank is not a seamless whole but a motley collection of organizations glued together from the original legacy banks. As another example, a consumer product company offshores its customer support process to save money but suffers quality problems in the transition and alienates some customers. As a third example, an energy services company implements a software package, but the employees reject the new business process that the software package supports, trying to use their existing process with the new software. (This last example is explored in a case study at the end of this chapter.)
Business transformations are difficult because they always involve people. Technology challenges are easy compared to people challenges: ensuring that employees are ready for the change, that they understand what it means to them, and that they accept it. Most failed transformation projects fail for people reasons rather than for technology reasons.
Excerpted from Business Modeling by David M. Bridgeland Ron Zahavi Copyright © 2009 by Elsevier Inc.. Excerpted by permission of MORGAN KAUFMANN. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Posted September 9, 2010
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