How do you know if you have a good business model? In simple terms, it should solve a problem for your customer. Obviously there’s more to it than that. Your business model conceptualizes how your organization will create value for customers.
There are three elements that need to be in alignment when developing an effective and differentiated business model.
- Clarity around the market (and your customer’s expectations).
- A business model that uniquely delivers value to customers, while providing a return for your company.
- An aligned organization design that puts the right resources, talent and focus on the activities that matter most to the customer.
Let’s start with the market and your customers’ needs.
The New Dynamic Market
It is cliché, but true: The marketplace is constantly changing. In the past, a company could compete with a distinctive product or service. Today, you need more.
“We have a good product (or service), so why change?” you ask. Well, the “if it isn’t broken, don’t fix it” mentality no longer works.
In the past, your R&D team created a product or service that you could take to the marketplace. From there, your focus was only on marketing and sales. It was very linear. At one time, this linear approach—get from A (product) to B (market)—was sustainable. Today, there are far more variables. Not the least of which is a fast-paced, technology-driven society that expects and demands more.
Apple is an example of a company that understands this. The iPhone started as a break-through product but has shifted emphasis from being a single, distinct product to a key part of a growing ecosystem of interconnected services and experiences. As a result, we’ve become dependent on our mobile phones. They keep us connected to people and news, help us coordinate our schedules, stay connected to work, allow us to bank and shop at any time of the day, record important events and play music along the way.
The modern marketplace follows a different pattern. It’s far more like a cog with multiple spokes branching from the center (your product or service), with each branch affecting another cog. From there, the ecosystem develops.
In today’s business marketplace, you may still develop a core product or service. But that product alone isn’t sufficient to drive sustainable sales and revenue. Rather, it’s the relationship to, and connections with, other add-on experiences and services that create a dynamic sales driver for the organization.
The Relationship of Your Business Model and Organization Design
The terms “business model” and “organization design” are often used interchangeably. Your strategic business model outlines what you’ll offer your customers and how you’ll differentiate your offerings. Organization design provides the blueprint for how you will fulfill those objectives—using your unique organizational capabilities and an aligned set of organizational choices. The design you select sets up your organization to meet marketplace demands, while allowing you to differentiate and achieve business returns.
So, leaders need to recognize that their work doesn’t end with the strategic business model. In fact, it’s really just the beginning.
A business model explains how you’ll:
- serve customers,
- generate revenue and profit, and
- differentiate your products or services.
The elements of your organization design explain how you’ll:
- capitalize on your team’s capabilities,
- adjust to market-driven complexities, and
- leverage the resources available to you.
When fully differentiated, your business model is unique as is your organization design. It identifies the specific choices you must make to better align operations with your desired results. Together, they work to move your company forward—ensuring that you’re ready to take on the competition.
Of course, if you don’t understand your customers, you won’t be equipped to fulfill their needs. We recommend using our ANCHOR tool to examine what your customer wants and how you can deliver it to them:
A—Audience: You have to know your audience to reach them in a way that resonates. Live in their shoes. You’ll be able to “feel their pain points.” Then convey how you can help them.
N—Need: What does your customer need? It goes beyond the actual product or service. What is that something extra that you offer them that they don’t even realize they need? What makes you different from everyone else who sells or offers the same thing? Knowing it will enable you to differentiate yourself and convey who you are.
CH—Channels: Understanding which channels your customers turn to for access to desired products and services is critical in developing an effective business model. For example, if your target market is the millennial generation, you’re not likely to reach many customers through traditional channels of distribution but rather through on-line channels.
O—Omit: Defining a strategy, need, and audience is as much about what you consciously choose not to deliver as what you choose to target. Successful businesses can omit opportunities outside their strategy to focus on what is needed to propel in-scope activities into market differentiators. As a result, they gain focus and leverage what competitors never capture.
R—Revenue: Remind yourself to keep your eye on revenue. Without it, there wouldn’t be an organization. Again, success hinges on understanding your customer. What price point can they handle? A millennial will have a much lower price tolerance for certain items than a 45-year-old professional at the peak of his or her career. Moreover, remember that your pricing is driven by your operating and overhead costs.
All of these ANCHOR questions are important for determining the right strategy, so you can develop a winning business model and properly align your organization.
The Role of Executive-Level Leadership
As the experiential, interconnected marketplace has become more commonplace, C-suite executives have had to adapt. Unfortunately, they don’t always understand what will lead to the true transformative change. They often fall back on what’s worked in the past. They’re trying to figure out how to work in a more connected market ecosystem. Success is possible though when top executives take on the role of a chief alignment officer (CAO).
A CAO makes the tough decisions to ensure all elements of the business are in sync. He—or she—looks beyond the functional elements (headcount, products and services, costs, customers, and revenues), and considers all organizational aspects that will create proper balance and alignment (i.e., work, structure, information/metrics, people/rewards, and culture/leadership.)
But a CAO won’t be effective if he can’t assess misalignments in the organization. To initiate the necessary organizational change to retain competitiveness, a CAO has to shift his own mindset (as well as others in the organization) to consider new organizational choices that will accommodate the dynamics of today’s market ecosystem.
In our book, Mastering the Cube: Overcoming Stumbling Blocks and Building an Organization that Works, we clarify this important shift when discussing strategy and capabilities: “Strategy is about the future; [organizational] capabilities are about the past.”
As the CAO, regard the future when creating a strategy. Then look to past experience, employing the right capabilities to successfully align your organization to that strategy.