Business Model Analysis & the Link to Strategy

What’s the best way to use business model analysis in larger organisations?

Steve Blank has done some outstanding work looking at how Alex Osterwalder’s Business Model Canvas can be used in entrepreneurial startups (see also this post and the ones that follow it). But there are still some questions about how to best use the concept in larger firms.

That is a problem on which I’m currently working.

I’m doing a project with a very large engineering firm. They provide an off-the-shelf product to the vast majority of their customers, however, there are an increasing number of customers that need bespoke solutions to problems. We are doing some work with the team that develops these solutions, and it Business Model Analysis has ended up being a very useful tool.

I’m working with Manny, whose team is in charge of developing futures analysis skills throughout the organisation. We are working with Moe, the manager of the Bespoke Solutions Team (BST), and the project is sponsored by Jack, who manages both Manny and Moe, along with several other teams.

When we spoke with Moe, he said that there were four different views within the firm of the role his teams should be filling:

  1. Change Agents: in this role the team identifies the problems that they should be working on, and develops solutions to these problems. They then turn the engineered solutions over to others within the firm who will manage delivery to customers.
  2. Service Provider: here the team has the problems specified for them by another group within the firm. They develop solutions (as they do in all four scenarios), and pass them on to the other group for execution.
  3. Service Delivery: in this role the team still works on problems specified by the second group, but after developing their solutions, they would be responsible for managing delivery as well.
  4. Profit Centre: is a full service role. The team would identify problems to work on, develop and deliver solutions. They may do this only for the parent firm, or they might be able to sell these solutions to others in the market as well.

There are a couple of dimensions along which these models vary. In a couple of them, the team is responsible for identifying the problems to address, while in two others the they are working to specification as the problems are defined for them. The other source of variation is project management: how much of the solutions development process should the team be responsible for?

Manny and I took these two dimensions and mapped out the four possible roles for the BST. Here is the map:

In each quadrant, there is an indication of the project management responsibilities: I1 = problem identification, I2 = solution development, I3 = solution delivery to customers.

In a lot of ways, these possibilities map onto the Four Roles for Your Innovation Team that I identified last year, with similar issues.

Manny and I have been working with Moe to map out Business Models for each of the four different roles. One thing that has become quickly apparent is that each role has a significantly different value proposition, which leads to differences throughout the business models, particularly in the areas of Key Activities and Key Resources, but also throughout the rest of the models.

The differences between the different business models are really important – since one of the critical issues is that a business model needs to be internally consistent. As we’ve continued to work on this, we have learned several important lessons:

  • Two of the quadrants fail to provide stable solutions: all the way through the process, I’ve kept asking people “who owns the customer?” I think they’re sick of hearing this, but it’s a critical point. In the Change Agent role, the team is responsible for identifying problems, but they don’t handle solution delivery. Which means that two different teams need to know the customer very well. This never works. The same problem occurs in the Service Delivery role, but this time they are responsible for solution delivery, but not problem ID. Same issue – to work well, whichever team is delivering solutions needs to also be identifying problems. That way, they can get really close to the customers, and develop a deep understanding of what they need.

    It makes a lot more sense to either be a Solutions Provider, with the other team responsible for both problem ID and solution delivery, or to be a Profit Centre, where the BST will be responsible for all of it. These are both more stable solutions, as ownership of the customer is clearly defined in both scenarios.

  • You can’t pick a little bit of each business model: as we’ve started to map out the Key Activities and the Key Resources, it has become apparent that each business model requires a different set of skills within the BST. If we make a list of the skills that they currently have, they have some from each of the four possible models, but they don’t have all of the skills needed by any one o them. Using the Business Model Canvas should help us develop a skill development roadmap for the team so that they are able to work within one coherent business model.
  • Why not use multiple business models? The BST currently has four distinct market segments in which they work. One question that has come up is why not use a different business model for each one? There are a few good reasons to avoid this. The main one is that it will be nearly impossible for Moe to manage four different business models within his team. Management attention is limited, and even though Moe is an excellent manager, every time I’ve seen someone trying to manage more than about two business models at the same time, trouble occurs.

    The second reason is that if the team develops one business model, they will own several important skills that the firm needs. This will make it much easier to branch out into other market segments over time, or to develop into a genuine profit centre generating external revenue. Both of these will be much harder to achieve if they are running multiple business models.

  • Which model is right is a strategic decision: this is the most critical point. There is no absolutely correct business model to use here. The best choice depends upon the firm’s strategy. This is where Jack is important – he has to decide on the direction that his teams are going go. Either the Solutions Provider or the Profit Centre model can work. Which one to pursue depends on how much of an external market there is for BST solutions, whether they have the skills and resources to pursue those opportunities, and, most importantly, where the firm wants to be going.

    If growth and innovation aren’t that critical, then putting the team into the Solutions Provider role is fine. However, if the firm wants to drive growth through innovation, they will be better off with a dedicated innovation team, which is what they get with the Profit Centre business model.

This is just one way to use the Business Model Canvas in a larger firm. Paul Hobcraft’s post has many other suggestions.

But the bottom line is that it is an excellent tool, and every organisation should be thinking about their business model. And working on how to innovate it.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

10 thoughts on “Business Model Analysis & the Link to Strategy

  1. Thanks for the refence in a very extensive post on BM’s. I’ve just finished a deep dive into explaining BM Canvas within a series of webinars, second one coming up next week. I really think the focus onto more complex business models really begins to test and extend the BM Canvas and the different ‘modelling’ that needs to go behind this gets interesting. The layering approach touched upon by AO but so far in my opinion not robust enough for complex organizations. I’d like to climb into this during 2012. Seems someone ‘down under’ is equally exploring this. Good to make a further deepening in exchanges Tim

  2. I agree Paul – it’s an area I’m interested in and I think it could be good to see what we could do on it together.

  3. I just discovered his work last week Matt! I grabbed a copy of his book – I haven’t read it yet, but it looks promising.

    Lots of interesting people around these days…

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