The universal business model underpins my approach to enterprise and solution architecture.
Based on the widely recognized business model canvas, it illustrates how any organization (or individual) maintains business continuity, which also makes it the ideal starting point for defining the enterprise architecture that supports effective and efficient business model execution:
The universal business model shows that the organization gets its revenue from selling products to customers, and how the revenue is used to cover the costs of running the business. I’m labeling it universal because it adequately describes any kind of business (or individual).
To sell anything, there must be a market for your products – a demand. And even if that market is there and has a demand for your product, you need to fight your way in to establish a position from which reach your customers.
To run any kind of business, you must have a product to sell. Otherwise, you’ll only have costs and no revenue, which quickly depletes your capital – causing you to go bankrupt.
When customers buy your products, they consume some of your services – for example your order processing service. You also need many other secondary services, some consumed internally, others targeting external parties like suppliers, customers (for example customer support services) and authorities (financial reporting and compliance services).
Providing any kind of service requires that you develop the capability to provide it. Developing effective and efficient capabilities is key to achieving business continuity, and is where you can really benefit from thinking architecturally.
Developing and maintaining the optimal capabilities to execute your business model costs money. The trick is to design your business architecture so that it generates more revenue that it costs, continuously solidifying your business rather than slowly (or quickly) depleting your resources.
Let’s take a look at the elements of the universal business model.
Your product is whatever directly generates your revenue. It’s what you bill your customers for in the invoices you send them.
So, what are you selling? Some sell cars or medicine, others electricity or telecommunications infrastructure. Some sell consumer goods, others sell raw materials and so on. And some sell specialized services like consultancy in areas like architecture or finance.
Each sell happens in a transaction where a customer consumes a service you provide. But it’s the product the customer pays for, the service is just in place to facilitate the transaction.
But what if you’re selling a service (charging your customer for it)? Well, then it’s usually really your time, you’re selling – your time is your product. Admittedly, time in itself is rarely a valuable product – it’s what you spent the delivered time on – how well you help you customer that makes your time valuable. But it still boils down to your time being your actual product.
Why am I (perhaps over-)emphasizing the definition of products? Because it is at the very top of the pyramid of criticality. If you don’t have a good product, you don’t have a basis for running a business. It also helps establish the right focus in the initial business analysis work or in workshops with managers and subject matter experts. It’s an effective starting point for a well-structured approach to assessing the business and discovering the potential for improvements.
I recently facilitated a workshop with a team that manages a webshop. Naturally, I first assumed that the items in the webshop were the products in their business model, but eventually realized that the revenue comes from a fee on each transaction, which is charged to a supplier of the consumer goods sold in the webshop. So, the product turned out to be the webshop itself, and not the items sold from it. This distinction made a significant difference in the subsequent analysis and architecture work.
Services represent any activity in you business. It isn’t billed in an invoice to a customer, because that would make it a product, but it may facilitate the selling and delivery of a product to a customer, or it may serve any other secondary purpose, which in turn may be entirely internal to the organization or may involve external parties like suppliers, customers or authorities.
Now you may wonder why I make such a point of distinguishing between the product and the service that sells and delivers the product? It’s because play different roles in your success (or failure).
The suitability and quality of you product are probably key factors in determining how happy your customer ends up being with your product. But the suitability and quality of the service you provide to facilitate the transaction determine how happy your customer is to do business with you. You may have the best product, but if your service is poor you won’t get new customers and will loose the ones you currently have.
I find the concept of services very useful in business analysis. We all agree that it’s important to provide the right services, and do it well. In workshops, I often use the universal business model as a backdrop for identifying relevant services, starting with the services that facilitate selling and delivering products, working backwards from there to sending invoices, collecting payment, manufacturing the products, buying raw materials (or finished goods for resale) and getting our own bills paid on time.
Then I expand the scope from there, exploring which services exist to innovate, design products, market products. And on to general management, including HR, finance, IT and so on. Services exist in all areas in the business model, and many address multiple areas.
Avoid confusing services with processes. Services identify the activities involved in running the business, whereas processes define HOW we provide the services.
Position is a measure of how well-established you are in the market. It’s how well known and strong your brand is. It’s how attractive your customers find your products and services to be, compared to the competition.
Maybe it boils down to how likely a new customer is to buy from you rather than from another company, and how likely existing customers are to continue buying from you rather than jumping over to another supplier.
Establishing a position in the market is possibly the biggest challenge for a startup company, and requires considerable resources and finesse.
When your order processing service facilitates selling a product to a customer, it happens through a (sales) channel. Typical examples of sales channels are physical retail stores, online webshops, business-to-business (B2B) integrations etc.
Offering the sales channels your customers prefer can certainly help bost your position in the market, but each channel is also costly to establish and maintain, so choose wisely – and implement metrics to monitor the continued viability of each channel.
Customers are of course an obvious element in any business model, but there is one thing about customers that’s often overlooked, which is that each customer is also executing their specific business model.
That means that you should basically study and understand your customers’ business models to ensure that your products and services match them perfectly. In a way, so-called value chains are really chained business models.
Taking this view will help you become more innovative, because seeing the strengths, weaknesses, opportunities and threats in your (potential) customers business model execution will enable you to invent new and improve current products and services to better match your customers’ needs.
While services identify what you do, processes define how you do it. Just as services exist whether you have catalogued them or not, so do processes.
A process is a series of steps, each of which require one resources to actively do something or to be used for something to complete the step. Some resources are human, others can be mechanical tools, paper and binders – or software.
Which services you must be able to provide is largely dictated by the business model, you have decided to execute, and authorities in general (to be legal and regulatory compliant).
But how you implement your services – by means of processes – is largely just up to you. And this is also where you have the most control over how much it costs to execute your business model. Admittedly, you may not control the costs of resources you have to purchase, but you can certainly optimize your processes to minimize the resource consumption.
Shortening the time it takes to complete your processes can save money, but also increasing accuracy and reducing failure rates can reduce costly waste of time and other expensive resources.
Again, this is not rocket science, but surprisingly many organizations still haven’t formalized and institutionalized their processes. In stead, each worker does thing in his or her own way, and almost all approaches are different. This causes friction in your business model execution, which depletes your resources and endangers your hard-won position in the market.
It’s important to understand that it’s not the process itself that costs money, it’s the resources it consumes and/or utilizes as its steps are carried out.
Resources is the only ingredient in the business model that you actually pay for. Humans resources are paid a salary. You pay rent or a mortgage for your office space. You purchase raw materials for your production. IT costs to develop and operate – you get the idea!
When you first start up a new business you typically bring some resources in to get things started. Your time and knowledge is one such resource, financial capital is usually also required. And maybe you start out using your garage, before eventually renting an office space somewhere else.
The trick to surviving the early uphill stages of a business, and achieving business continuity, is to avoid depleting your resources.
If you loose your workers, there will be noone left to carry out the steps in manual processes. If you loose your office space because you can’t pay the rent, you probably can’t avoid significant friction or complete collapse in your process execution. If you can’t pay for raw materials, you can’t continue producing and delivering (and selling) products.
Therefore, there’s much to be gained from thoroughly inventorying the resources you have available, and designing your products, services and processes accordingly. Otherwise, if your process steps aren’t aligned with the resources at hand, the processes won’t work.
Discovering currently unused resources can also feed into your innovation, as long as it also matches your customers’ needs (for improving their business model execution).
There’s also much to be gained from optimizing your processes to consume/utilize fewer resources – in fact, that should be you only focus when assessing the efficiency of your processes.
Suppliers supply the resources you don’t already have on hand. Yes, I realize that you already knew that!
Why suppliers still warrant mentioning is that as we have also stated, they supply the resources you need to execute your processes. That means that efficiency, accuracy, cost-efficiency in your supply chain carry over in your process execution.
So, much can be gained from optimizing ordering, receiving, paying for, monitoring prices of and getting correct information about supplies.
Your revenue is very simply your sold products times their unit price. Unfortunately, only banks seem to be in a position to just raise their prices when they need more revenue. Everyone else risk weakening their position in the market if we raise our prices too much.
Companies are always looking to lower their costs, but what they aren’t necessarily realizing is that they should really focus on is lowering their resource consumption/utilization in their processes with lessening value of the process outcome.
Other than that, the only situation where you could lower a cost without adjusting your processes, would be when a viable resource can be purchased at a lower price – which you should of course always strive to do. When companies aren’t buying the cheapest resources that are sufficient for their needs, it’s typically because they lack the capability to research and find cheaper but still viable alternatives.