July 2010: A Note from Jeff Mack
The Bottom Line: Do You Aspire to a Business Model or a Model Business?
As I talk to a variety of client and prospect organizations about their business and what they are trying to achieve, I always find it fascinating to hear the different perspectives and tactics being deployed. Frequently even more intriguing is the view of the business model and the investment strategy to fuel that model.
When the conversation turns to business models, it can suddenly become labored. Somehow, clear and concise descriptions of one’s business model seem to be very difficult to articulate. Not surprisingly, an Accenture study found that when 70 key executives from 40 companies were asked to describe how their company made money, 62% of them had difficulty clearly describing how the process was accomplished.
You might be wondering why a complete and accurate description of a company’s business model even matters. Or you might be wondering what the heck a business model is? Both are great 
questions that deserve answers. Given how frequently the term is used in business publications and discussions, I expected to find the definition chiseled in granite on that famous street in Lower Manhattan.
A little research, however, quickly uncovers the fact that there is no consensus amongst the experts as to exactly what constitutes a business model. There are of course some recurring themes and components, but there is not a rock solid take-it-to-the-bank foundation for understanding. It’s no wonder that discussions become murky in search of an anchor point.
Some of the more frequently referenced business model definitions include those in Mark Johnson’s new book entitled Seizing the White Space: Business Model Innovation for Growth and Renewal. In it, he defines the four-box business model and its underlying and interlocked components as follows.
click to enlarge
Customer Value Proposition
First and most important, a successful company is one that has found a way to create value for customers — that is, a way to help customers get an important job done. By job we mean a fundamental problem, in a given situation, that needs a solution. The best customer value proposition is an offering that gets that job — and only that job — done perfectly. The lower the price of the offering and the better the match between the offering and the job, the greater the overall value generated for the customer is. The more important the job to the customer, the lower the level of customer satisfaction with current options, and the better your solution than your competitors’ at getting the job done, the greater the value is for your company.
Profit Formula
The profit formula is the blueprint that defines how the company creates value for itself. People often think that profit formulas and business models are interchangeable, but how you make a profit is only one piece of the model. It consists of the following:
- Revenue model (price × volume)
- Cost structure (assets; direct and indirect costs; and a model of how, and whether, scale affects costs)
- Margin model (How much does each transaction need to net to cover the cost structure and deliver target profits?)
- Resource velocity (How much revenue do we need to generate per dollar of assets and per dollar of fixed costs, and how quickly?)
Key Resources
The key resources (or assets) are the people, technology, products, facilities, equipment and brand required to deliver the value proposition to the target customer. The focus here is on the key elements that create value for the customer and company, and the way those elements interact. Every company also has generic resources that do not create competitive differentiation.
Key Processes
Successful companies have operational and managerial processes that allow them to deliver value in a way they can successfully repeat and increase in scale. These may include such recurrent tasks as training, development, manufacturing, budgeting, planning, sales and service. Key processes also include a company’s rules, metrics and norms.
When the four-box model and all its components are fully identified, it is designed to answer these questions:
- Why would someone want to buy something from you, and only you?
- How will you make money selling it?
- Precisely, what are the important things you must do to execute the plan and meet the stated objectives?
Johnson repeatedly makes the point that the degree to which a company gets the components of these four boxes clearly understood, articulated, and interlocked can spell the difference between a huge success and an also-ran left to fight for scraps. He goes on to make the point that if you find yourself struggling for survival, perhaps your business model needs a makeover. Perhaps it even needs to be reinvented. Here is an entertaining short 3-minute video illustrating some noteworthy reinventions.
The high tech industry has always evolved at breakneck pace with regard to new products and functional innovations. The industry itself is now undergoing tremendous change. As a part of that industry, Integrated Computer Systems needs to continually evolve and re-examine our place in it. And most importantly we need to evaluate our own business model to ensure that we are nailing the Customer Value Proposition and the other three box components that follow it.
We would love to hear from you what that one and only job is that you need us to do perfectly. Email me at jeff@ics-support.com. I am betting that we might all be surprised and enlightened by the responses. I would guess the same would hold true for many of your businesses if you were to ask your customers a similar question. The future holds equal parts promise and challenge, and just think of what we can all learn together.
When Mark Johnson's four-box business model and all its components are fully identified, it is designed to answer these questions:
- Why would someone want to buy something from you, and only you?
- How will you make money selling it?
- Precisely, what are the important things you must do to execute the plan and meet the stated objectives?