Model your enterprise to make it work for you

Adrian Grigoriu

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A Business Model is realised by a Value Chain

A Business Model should be evaluated on the Value Chain that realises it

In the 1980s, Michael Porter proposed the Value Chain (VC) concept to illustrate the operation  of a company. A Value Chain is a set of activities that an organization carries out to deliver value to its customers and return a margin of profit to the company and stakeholders.

The profit is the VC margin, as in Porter's picture.

Revenue returned  -  Costs    =  Profit Margin

On the other hand, a Business Model (BM) shows the way a company, in delivering to its customers, makes profit and, in general, returns value to its stakeholders. Here is Osterwalder's and Pigneur's BM canvas.

The major elements that determine a Business Model were defined as the

- target Customer Segments

- channels employed to reach them

- specific type of Customer Relationships  

- key Activities - the processes involved in manufacturing and delivering the product 

- key Resources - the physical resources that execute  the processes

- kind of Partnerships with  3rd parties that execute activities and provide key deliverables 

- Revenue Streams -  the revenue generated by the business model

- Costs -  per activities and resources.

Enterprises may deliver the same kind of products, to different customer segments, through different channels, employing different processes and resources while outsourcing operations and parts to different partners and geographies. Some choose to deliver luxury products while manufacturing takes place in-house. Some chose to sell online bottom priced products. Both companies make profit though, but in different ways. i.e. employing different business models.

Hence, the Business Model, is the enterprise configuration that profitably delivers a product to a specific market segment.

A BM analyses the activities and costs of this operation by looking at customer segments, delivery channels, manufacturing processes, physical resources and partnerships.

While a Business Model identifies primarily the cost/benefits of the configuration of a company returns value/profit by identifying the related activities, resources, channels, partnerships..., the Value Chain describes the company sequence of activities that deliver the product, while returning a "Margin", i.e. profit. While the outcome of the Business Model is a Value Proposition, the product of the Value Chain is a chain of activities and as a by-product, a "Margin" that quantifies the profitability of the Value Chain.

While the BM stresses the particular way a company is organised to make a profit from delivering a product, the Value Chain identifies the key activities that add value in the process. But there is always a Value Chain that implements a Business Model. As a corollary, any Business Model should be evaluated or built on the Value Chain that realises it.

The Value Chain of a Business Model identifies the sequence of activities that deliver the product. Based on these, the associated resources and partnerships can be analysed to determine the Value Proposition of the Business Model.

Therefore, in addition to representing a Business Model as a number of boxes on a canvas, you can represent it as the associated Value Chain that returns a Margin to the business.

Here is a mapping between the generic Business Model and the Value Chain representation.

The Business Model Partners box could be mapped all along the Value Chain Inbound Logistics, Operations... The BM key Activities would be the Porter's VC Primary activities while the BM Channels would be part of the VC Sales and Services. The Value Chain becomes as such the basis for analysis and construction of a Business Model.

The Business Model would also distinguish the key elements of the Value Chain that differentiate the company.

A Business Model expressed as a Value Chain (VC) shows the sequence of top processes that add to the VC Margin and accumulate cost at each stage of the chain. 

Different Business Models for similar types of products may have different customers segments, channels, Value Chain activities, resources and partnerships. One may address, for instance, the high end market while the other the low end or the mass market. Apple, for instance, seems to aim at the top end by investing in artistic design, innovation, reliability and, in general, perfection. That is high effort, high cost. On the other hand, to minimise costs, it outsources manufacturing activities. And to achieve best in class, it outsources industrial design to partners. And that while it remains focused on what it does best, the electronic design.

Partnerships are key in the realisation of the Value Chain for a Business Model since, without outsourcing of manufacturing to partners, for example, the Business Model may turn negative.

Today, without the Internet, the Cloud and partnerships many Business Models would not be viable. Customer relationships are also key to the Business Model. Loyalty programs that realise customer retaining strategies are effective because it costs less, marketing says, to retain a customer than gain a new one.

But to truly estimate costs, the value chain which implements the business model should be mapped on the architecture of the enterprise because it documents in sufficient detail not only the activities but also the resources which costs have to be estimated. Without EA, the business model assessment is, more or less, guess work.

A business model, evaluated on an enterprise architecture, underlines the configuration of the enterprise comprising of processes and channels and the organizational and technology resources that implement them.

In the end, any Business Model may be represented as an Enterprise Architecture view.

Without Enterprise Architecture, it is hard to identify the activities, resources and channels that ultimately determine the viability of the Business model.

To evaluate and design a Business Model we need to model first the Enterprise Architecture so that we understand the activities, resources,  channels...  employed..

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Adrian is an executive consultant in enterprise architecture, former Head of enterprise architecture at Ofcom, the spectrum and broadcasting U.K. regulatory agency and Chief Architect at TM Forum, an organization providing a reference integrated business architecture framework, best practices and standards for the telecommunications and digital media industries. He also was a high technology, enterprise architecture and strategy Senior Manager at Accenture and Vodafone, and a principal consultant and lead architect at Qantas, Logica, Lucent Bell Labs and Nokia. He is the author of a few books on enterprise architecture development available on Kindle and published articles with BPTrends,the Microsoft Architecture Journal and the EI magazine. Shortlisted by Computer Weekly for the IT Industry blogger of the year 2011. Publications: