If you can’t answer this question, you may be a sitting duck!

Posted by on Jul 25, 2011

What is your business model?

Lately we’ve taken to asking every prospective new client the same question in our exploratory discussion: “What is your business model? A bit of history will help to explain why we think this question is important.

When I began consulting on strategic management, I thought it strange that in the five days it typically took to create a strategic plan, very little time was spent actually discussing strategy. We devoted many hours to SWOT lists, mission statements, climate goals, objectives and action plans. Strategy was implicit in many of these discussions, but it was seldom discussed and debated directly.

Shouldn’t strategy discussions be about, well, strategy?

We were slow to change this because clients said they were very satisfied with our services. We thought we understood our weaknesses better than our clients did, so we decided to transform the strategy-making process despite a lack of client pressure to do so. In 1995 we cut SWOTs, mission statements and climate goals from the agenda. This cut the time needed for strategy sessions by 40%. We revamped the remainder of the process by greatly increasing the amount of time devoted to direct and explicit discussions of strategy.

Now we think it’s time for another transformation in strategy making. This is where the question about business models comes in.

Many executives can’t give clear answers to our question, but we think that’s understandable. The term “business model” is thrown around a lot, but seldom explained. Even when they know what a business model is, many executives still can’t describe their organization’s business model. We’ve concluded that they’re so close to it that they don’t think about it very often.

If you can’t describe it, how can you discuss it?

What makes the business model such a powerful strategic concept is that it’s a concise description of the organization’s strategy. A clear explanation of your business model outlines how you create, deliver and capture value. It defines your target customers, value proposition, sales strategy, sourcing, production, organization and resource acquisition. This makes it a natural complement to the Balanced Scorecard, focusing your metrics on what matters most. In essence, choosing the right strategy means choosing a business model that optimizes risk and return for the conditions in which you operate.

Making discussion of the business model explicit achieves something vitally important in team strategy making – it gives the executive team a shared understanding of what underlies their strategy, and a common language for discussing it. This follows the imperative we’ve been driven by since 1995 when we removed SWOT analysis and mission statements from the strategy making agenda. That imperative is to make strategy discussions and decisions as clear and explicit as possible.

Since 2003, we’ve been building each organization’s business model into its strategy. If you’ve completed a full strategic plan with us since 2002, your business model is embedded in your “strategy map”. This provides two critically important tools for updating your strategic plan.

Tools for updating your strategic plan

First, understanding your business model is one of the keys to finding new ideas to improve it. Reviewing each part of your business model will reveal improvement opportunities you’d be unlikely to notice otherwise. We think this should be a regular part of your strategy update processes. Continuous improvement of a healthy, viable business model will help your organization to increase its efficiency and effectiveness. This helps to keep your strategy sustainable for as long as the business model remains competitively viable.

But for all the power a good and continuously refined business model may be, it can quickly become your biggest weakness when a competitor adopts a superior business model. That leads us to the second reason why we began embedding business models in every client’s strategy map. We wanted to encourage rich discussions of all the important elements of every firm’s strategy. We believe that if your business model wasn’t intentionally and explicitly selected from among competing alternatives, you’ll be far less likely to notice outmoded elements of your business model that are becoming liabilities. You risk being lulled into thinking that you can nurse an ailing business model back to health, when what’s really required is a major transformation.

Sticking with an outmoded business model can be a fatal flaw, as organizations like Blockbuster Video and Borders Bookstores have recently discovered. The internal pressure to stick with an existing business model can be very strong – so strong that internal defenders of the company’s operating core may unwittingly become an organization’s biggest competitive threat.

Getting on the right side of a dichotomy

These two reasons – finding opportunities for continuous improvement of your existing business model, and knowing when it’s time for a major transformation – illustrate a critically important dichotomy in strategy. In some cases, the right focus is on increasing the operational efficiency of an existing strategy. In others, the time has come for a major transformation. It’s critical to know which is which. Having a clear understanding of your business model will help with that decision.

If you plan to update your strategic plan this year, make a note to yourself to review this article before you do. Reviewing your business model will provide you with several candidates for strategic discussion . . . and quite possibly, a few golden improvement opportunities. Not to mention that it may help you to avoid becoming the proverbial sitting duck.

© Knowlan Consulting Group Inc. 2011