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Business and Operating Models
Digitrack

Business and Operating Models

Ravi Kumar Pillai

These days I get to answer a large number of queries and doubts from youngsters who approach with genuine eagerness to be guided and mentored into the world of entrepreneurship. While the lure of being their own masters is indeed tempting, most of them are skeptical of taking the first steps and ask “What if things don’t work out?”

Both their passion and the apprehensions are justified. It is better to seek clarity of ideas, processes, resources and risks than to jump in with half-baked concepts. Unbridled enthusiasm devoid of thoughtful considerations of realities cannot lead to success.

One is reminded of the crisp reply by Cheshire Cat in ‘Alice in Wonderland’:

Would you tell me, please, which way I ought to go from here?,” asked Alice.
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“so long as I get somewhere,” Alice added as an explanation.

My advice to the would-be-entrepreneurs is to pause, introspect, check and move step by step. At the risk of appearing to put brakes on their effervescent enterprising spirit, I usually beseech them to search for clarity, consistency and relevance in their proposition.

Ideation is the springboard to entrepreneurship. Abraham Lincoln is quoted as having said, “If I had five minutes to chop down a tree, I’d spend the first three sharpening my axe.” Ideation calls for curiosity, analytical ability and critical thinking. With a success rate of below 5%, most startups end up folding up or losing out. A careful analysis would reveal serious gaps in the assumptions about customer needs and the sustainability of the product or services proposed.

Two things that stand out between the winners and losers, especially in the context of digital technology businesses, are Business and Operating Models. Whether starting a new business or transforming an existing one, Business Model and Operating Model are critical to success.

A Business Model describes how you propose to create and deliver sustainable economic value to the stakeholders. A good Business Model answers Peter Drucker’s classic questions, ‘Who is the customer? And what does the customer value?’ Business Model should be understood as the high level description of the objectives, processes, interfaces and expected outcomes of an enterprise.

An Operating Model defines “how” products and services are sought to be delivered and includes customer relations, sales, after sales support and the management of revenue and costs. Operating Model focuses on the nuts and bolts of servicing and monetizing the customer needs through simple, efficient and sustainable procedures and methods. Digital technologies impact and improve the operating model, specifically the last-mile customer interfaces, servicing and revenue collection.

Central to a successful Business Model is the clear idea of the customer value proposition. Most business failures are because of their inability to convincingly define a value proposition that excites the customers and prospective customers.

The case of IBM illustrates how business model adaptations as a response to market opportunities and challenges sustain and grow enterprises. IBM started out as a tabulating machine maker and transformed over the years to hardware leaser, vendor of mainframe, minicomputers, and PCs and in the latest avtar has turned itself primarily into an IT services company with a focus on software-as-a-service and cloud solutions. A look at the business landscape will show many examples of how old and established names lose out to agile players due to complacency and failure to keep learning and renewing capabilities.

For any business enterprise, survival and growth can no longer be taken for granted. Being transformation ready is the only option for businesses. For startups and ongoing businesses, it is important to be clear and committed about Business Model and Operating Model.

For those seeking a framework for Business Model preparation, one of the best resources is the Business Model Canvas, devised by Alex Osterwalder, Swiss author, consultant and entrepreneur. His template for business model is arguably the most comprehensive tool to develop a sound business model. The nine-part “business model canvas” is essentially a systematic structure highlighting the elements of a business entity. It covers key resources, key activities, key partners, value propositions, customer relationships, delivery channels, customer segments, cost structure and revenue streams. In the absence of a comprehensive perspective of business framework, many enterprises nurture a culture of thinking in silos and remaining within comfort zones. Such organization hardly become breakout successes.

While Business Model provides the high-level picture of a business, operating models drill down the operations and delivery processes. Innovative digital technology applications are currently triggering revolutionary changes in service delivery and revenue realization.

Because of the impact on costs, revenue, delivery practices and customer experience, Operating Models are central to digital technology applications. Successful disruptive startups are characterized by operating models with focus on niche market needs, great customer experience, cost optimization, agile processes, lean management style and ease of scale up of revenue and profits.

A very simple model to understand a business enterprise is that business aims to generate economic value for stakeholders by meeting the needs of the society for products and services. Therefore, every business worth its name should seek to reduce cost of operations and increase revenue. A Business Model defines how the enterprise seeks to achieve this while an operating model goes into specific steps in the process of delivering the products or services and generating the revenue.

Digital technologies can be leveraged to enhance the operating model efficiencies for increasing revenue realization and reducing cost implications. Digitalisation of processes impact both the cost and revenue sides of the business outcome. They can also improve the customer experience as well.

On the cost optimization side, strategies to digitalise business processes, implementation of customer self-service modules, instituting “Kaizen” programs for continuous review and improvement of processes, enhanced data management and analytics, outsourcing and process automation are some of the methods to cutdown cost of operations. Cost saved is in effect equal to added sales revenue.

As for revenue stream resilience and scale up, digital technologies enable deployment of customer friendly strategies such as lowering transaction cost and applying subscription-based pricing or pay-as-you -use model depending upon volume, frequency and overall revenue size etc.

Digital technologies enhance operating models in a variety of ways and impact various components of operations such as:

  1. Customers: Digital technologies, tools and applications have the potential to impact customer centric activities such as segmentation, identifying the target customer profiles, recognizing and bringing on board the customer touch points and articulation of the customer value proposition in clear and measurable terms.
  2. Financing: Funding of the business, investments in the resources as well as financial reporting, analysis and evaluation can be supported by digital technologies which help to capture, record and analyze the funding and expenses.
  3. Process: Streamlining, simplifying and documenting the processes of service development, delivery and revenue collection are key to achieving operational effectiveness. Agile processes optimize the time to market and incorporate near real time upgrade of the way products and services are developed and delivered. Cloud-based service delivery is becoming the norm rather than exception. Capabilities mapping and upgrade to align with technologies and business priorities are an important aspect of process resilience.
  4. Agile: Speed of delivery is critical in digital technologies deployment. Agile is the key to business process effectiveness. Agile approach optimizes time-to-market and allows process improvement on the go.
  5. Customer Focus: Customer is central to the business process and delivery procedures. Lack of speed of response, shortage of core talent to meet the demands of the market and slackness of innovation are the commonly identified signs of low customer centricity. An operating model that seeks to generate revenue and profits should recognize and reinforce the primacy of the customer needs.
  6. Technology Trends: Cloud based operating models are bound to become the key channel to deliver digested services. Data Analytics and Algorithms would play an increasingly critical role in the operating model of businesses as digitalization of services gets established as the primary method of generating revenue.
  7. Organizational Structure covering job roles, responsibilities and interfaces is an important element of the operations process. Rules including delegation and decentralization contribute significantly to governance effectiveness. Culture, values and ethical standards are to be reviewed as part of comprehensive organizational review.
  8. Support: Infrastructure facilities, IT Systems and Data, Algorithms and Applications are incorporated in the operating model to ensure integrity and sustainability of the current level.

Startup entrepreneurs and managers responsible to drive digital transformation in organizations need to look at business and operating models seriously. These are the cornerstones of success. Without clarity on both, businesses would be leaving their very survival to chance. By incorporating them into the business plan and leadership strategy, the risk-reward profile can be significantly improved.

*Ravi Kumar Pillai is CEO and Principal Consultant, Cherrypick India Consulting and Business Solutions Private Limited, Trivandrum and can be contacted at cherrypickindia@ gmail.com.