A business model (i.e. the ‘guts of the business’) is the combination of operating entities, plants/locations, products or services, distribution channels, customers and the associated operational policies that support this unique mix.
A well defined business model clearly states how the company is organized, what products/services it sells to whom, and how it ‘goes to market’.
A Confusing Business Model =>> Disarray
If the business model is too complicated, muddled, or confusing, disarray (like fog…) can envelop the organization. When management does not have a grasp of the current business model, the company casts about aimlessly, trying to sort out a clear direction. If this happens, then the questioning will start…the Board of Directors to the rank and file employees will be raising questions about how to best run the business.
When we ask management to articulate their business model, we get varied responses:
- They try to explain it, but really can’t describe it accurately or clearly
- They describe the business reasonably well, but the facts are wrong or outdated; their portrayal is not what really exists today
- They present it well and factually, but intuitively don’t understand how the unnecessary complexity is hurting the overall organization
One way for management teams to navigate through their business model is to focus on these four questions:
- What business do we think we are in?
- What business are we really in?
- What business do we want to be in?
- What business should we be in?
Questions 1 & 2 are about today and Questions 3 & 4 are about the future. It’s great if the answers to those four questions are consistent; however, often the answers are confusing and not well thought out.
A Tangled Fishing Line
A confusing business model usually means unnecessary complexity permeates the organization. Unnecessary complexity:
- often is caused by excessive product or service proliferation
- creates a higher cost structure and drives up costs exponentially…product design costs, customer support costs, manufacturing expenses, sales expenses
- causes corporate ‘high blood pressure’- tension and stress are everywhere
- clogs up the company processes and hinders the employees’ ability to execute effectively
- sucks up cash (higher than necessary inventories)
- prevents resources from being deployed to high potential areas within the company
- allows negative emotions to ooze into the company’s decision making
- turns ‘good thinking’ into bad decisions because the business model assumptions are flawed
By gaining a shared understanding of the real ‘as is’ and desired ‘to be’ business model, a team can take action to improve performance and grow.
We can help with the exciting process of defining or re-defining the Business Model. Contact us for more information.