In the course of our Future of Finance Research over 2017, when employers told us how they were adapting for the digital age, they spoke in terms of optimising or transforming their business model.
The business model frameworks they mentioned most frequently than were the Porter Value Chain, the Osterwalder Business Model Canvas and the St. Gallen Business Model Navigator.
In this section, we first provide a brief overview of each of those frameworks before introducing the CGMA® Business Model Framework. This is the Association’s more recent contribution to how a business model framework can be used to frame conversations about how the business creates value.
Professor Michael E. Porter developed the value chain7 as a tool for setting out the activities performed by a business across its value chain so that linkages are clear, and each element can be examined when developing strategies to gain competitive advantage.
The business’ primary activities are shown in a logical sequence from inbound logistics through operations, outbound logistics, marketing and sales to deliver value to the customer after a margin for the business. The business’ support or overhead activities are arranged above this sequence.
7 Competitive Advantage, creating and sustaining superior performance, Michael E. Porter 1985
Unilever’s 2019 strategic report8 includes this representation of their business model. At its center is an explanation of “What we do” which follows a similar logic to the Porter Value Chain. It is shown as a feedback loop so the customer is at the beginning and end of the cycle. The resources and relationships Unilever depend upon are shown to the left. The stakeholders for whom Unilever create value are shown to the right. These lists reflect a recognition that to generate sustainable financial returns for shareholders, a business must also create value for customers, staff, suppliers, society and the planet (or at least minimise its impact on the environment).
8 Unilever annual report and accounts 2019
The Osterwalder Business Model Canvas9 puts the value proposition for customers at the center. The partnerships, resources and activities needed to develop the value proposition are to the left. To the right are customer relations, the channels used to deliver the value proposition and the target segments. The resultant costs and revenues are shown at the base.
This diagram is a user-friendly template that can be used to frame conversations about the business model and how it might be developed. The layout of this framework should prompt proper consideration as to how the different elements of the business fit together. There is even a free App10 that provides an online visual way to illustrate and record a discussion of a business model.
9 Business model Generation: A Handbook for Visionaries, Game Changers, and Challengers, Osterwalder, Alexander and Pigneur, Yves, 2010 10 Business model canvas tool
The St. Gallen Business Model navigator is another intuitive framework. It challenges managers to address four simple questions to articulate their understanding of how the business works: 1. Who is our target customer? 2. What do we offer them; what is our value proposition? 3. How does our value chain create that value proposition? 4. What does our revenue model capture value?
By answering these four questions, the St. Gallen team has identified 55 patterns that explain how businesses operate. For example, the ‘Lock In’ pattern describes how in 1904 Gillette sold razors relatively cheaply but gained many years’ regular custom for blades. The same pattern has been used by HP with printers, Nestle with Nespresso Coffee and Amazon with the Kindle. An important lesson from the St. Gallen Business Model Navigator project is that successful innovations are seldom based on radically new ideas. They usually come through studying what already works elsewhere to find imaginative new ways to adapt, refine or combine proven approaches. Innovative use cases for emerging technologies can provide further opportunities.
11 The Business Model Navigator, Gassman, Frankenberger & Csik, 2014
Business model frameworks tend to focus on the value proposition for the target customer and the financial reward to the business. However, there is a growing recognition of a need for a more inclusive, or enlightened self-interest, approach to sustain value generation over a longer-term.
The CGMA Business Model Framework puts the value at the centre. It situates the business within its ecosystem and proposes four key questions to be considered:
1. For whom and with whom do we create value? 2. How and with what do we create the products, services and experiences that meet customer needs? 3. How do we match and deliver our products and services to the right customer at the right time, place and price? 4. How do we share the benefits of value creation to incentivise key stakeholders to continue to partner with us to create and deliver value?
The CGMA report, Connecting value generation for the long term,13 is a practical guide designed to help boards, senior executives and staff to quickly and easily gain an understanding of their organisation’s business model.
12 CGMA Business Model Framework 2018 13 Connecting value generation for the long term, A practical guide to the CGMA Business Model Framework
