Why understanding your business model is the key to long-term success
Defining a business model in the context of such broad parameters is no easy task. It requires the board to drill down into detailed, and sometimes conflicting, issues relating to the organisation’s purpose, stakeholders and value proposition.
Some key lines of enquiry include:
- For whom and with whom do we create value?
- How and with what do we create the products, services and experiences that meet customer needs?
- How do we match and deliver our products and services to the right customer, at the right time, place and price?
- How do we share the benefits of value creation to incentivise key stakeholders to continue to partner with us?
Since management accountants have an integrated overview of their organisation’s business and finance operations, they can often play a key role in defining the business model and helping the board to understand how the organisation creates and maintains value. At the Association of International Certified Professional Accountants, we have produced a practical guide and toolkit to help boards, senior executives and support staff to gain a better understanding of their organisation’s overall business model. The guide also explains how they can use our own framework, the CGMA Business Model Framework, to prepare for board discussions and decisions.
A good framework is a convenient and practical tool for getting to the heart of a business model. It can be used to define the organisation’s key stakeholders (customers, investors, suppliers etc.) and how the organisation harnesses key resources and relationships to create the products, services and experiences that its stakeholders want. It can also be used to explore how the organisation is delivering value in areas such as loyalty, revenue, satisfaction and security, and to evaluate how value – such as profits – is captured and distributed among stakeholders.
Once an organisation has established which activities are relevant to its current business model, it needs to focus on the future, looking specifically at value considerations beyond short-term financial results. These will include the organisation’s brand, level of customer loyalty and reputation. It should continue with activities that have broadly positive consequences on value creation. On the other hand, if it is engaged in activities that appear to be irrelevant, obsolete, delivering insufficient value or even detrimental to value creation, then it is time for a pause and a rethink.
Again, there are some key questions to ask:
- Would this activity be considered ethical by wider society?
- Will this activity encourage customers to keep transacting with us in the long term?
- How can we measure the value of this activity?
- Does this activity undermine trust in our organisation?
Ultimately, an organisation that has a good understanding of its business model is more likely to enjoy long-term success than one that hasn’t. This is because knowledge of the business model facilitates better decision making at board level, as well as more informed mitigation of risks. So the process of defining an organisation’s business model should set it on a future path towards greater economic output, improved productivity and wealth generation that benefits a broader spectrum of stakeholders.