Frequently, when reading articles or books on business architecture, the following advice emerges:
Business architects start with the strategy of an organization. They take that strategy and map it to the capabilities of the enterprise to clarify the capabilities that must be improved or matured in order to effectively execute.
Sure… you could do that, if you want to fail. (Before you flame me, read on.)
A business analyst may start with some bit of strategy and start hunting for capabilities… a business architect will start with a model of the enterprise, its value streams and its business models. Starting with strategy is a fool’s errand.
Because strategy is meaningful within context. It is not meaningful without context. Starting with strategy means “starting without context.”
Outside of the context of a business model (and, in some cases, value streams), business strategy is about as useful a tire swing with no tree to attach it to.
But wait, you ask, don’t management consultants say to “start with the strategy?” Yes, but it’s a trick statement: they don’t define what strategy is, so that they can start with a business model and CALL it a strategy. That’s what smart ones do. Dumb ones simply fail.
Business architects add no value if they bring analysis methods that are no more valuable than the poorly described “consulting methods” that management consultants use today. (If those methods worked, why would “alignment” be a problem?) Simple methods like SWOT and Five Forces and even Balanced Scorecards can fail catastrophically if there is no recognition of the fact that these methods are only useful within the clear and well described boundaries of a business model.
This post is a follow-up to my prior post: Business Models in Business Architecture. In that post, I discuss the fact that some business thinkers, including Osterwalder, consider business strategy to be “on top” with business models being “underneath” the strategy level. (At least, that’s what he wrote when he was a student in college.) In that ordering, Osterwalder himself was saying “start with strategy” and then to describe the business model. On this we disagree. I agree that business strategy is different from a business model. I disagree on which comes first. Depending on what you define as strategy, the business model should be on top.
[Aside: Note that some people consider “strategy” to include many of the elements that Osterwalder, and I, consider to be part of the business model. Is the value proposition and the list of products the same as the “business strategy” or the “business model?” If the strategy represents the things that need to change, in an organization, in order to achieve a mission, then the business model comes first, and the strategy comes second.]
Who’s on first?
The business model answers key questions about the INTENT of an organization. How does that organization WANT to make money or deliver value? Who does that organization WANT to reach through customer channels? How SHOULD costs be structured? How do you HOPE the partners will react? These are all wishes, but they represent the intent of the organization. A business model is the context. It is the setting for the business story.
Note that once a business is operating, there are realities in that business model. Sometimes the most important question is: are we living up to our business model?
Strategy is the action: what changes do we have to make in order to REALIZE that business model? What do we need to do differently than we are doing today in order for the business model to become reality? That is strategy. It is the action, not the destination. But action starts somewhere and travels somewhere. Strategy starts from where the business model is today, and gets an organization to where the business model SHOULD be tomorrow.
There are two possibilities, of course. Either the organization TODAY is living up to the promise of its business model, or it isn’t.
Not living up to your business model
As I noted above, a business model is a declaration of intent. It includes things like “channels”, “partner relationships”, and “value propositions”. So, what if your costs are too high, or your customers don’t accept your value proposition? That means your organization is not living up to the business model. In that case, the diagram above is a little misleading. Your strategy takes you from your INTENDED business model to your REALIZED business model. (In effect, the business model is not changing… the organization is).
Living up to your business model
So what if your business is doing very well. After all, it does happen. Sometimes a business will earn the money it intended, with the cost structure it hoped for, and the business relationships it wants, along with value propositions that delights the customers. What is strategy in that case?
In this case, strategy usually reflects one of two possibilities:
- incremental improvements in the business model (cut costs a little more. Improve customer satisfaction a little more. etc), or
- adding a new business model to the organization.
The most common one is the first. Minor improvements: Increase the predictability. Reduce the risk. Cut costs. Improve customer satisfaction. Expand to a new market with an existing product. These are all incremental changes to the business model.
The second one grabs a few more headlines: adding a new business model to the organization. When Amazon decided to offer cloud services, it was adding a new business model. When Google brought out G+, it was adding a new business model. When Exxon Mobile bought a series of natural gas extraction companies, it was adding a new business model.
In that case, the executives didn’t just say “we are good, let’s stop innovating.” They pushed for something better. They defined what that something looked like with an update to the business model (or an addition to it) and then pushed the organization to achieve. How did they push? Strategy.
Starting with the business model
So, here comes the kicker… all those business architecture journals and articles that say “start with the strategy” are naïve at best, and at worst, dead wrong. Understanding the value of the business model concept means changing your practices, updating your methods, and doing something different. It means, before you look at the strategy, look at the business itself. How does it work? How is it supposed to work? What is the business model? Is the organization living up to the business model?
Only after you understand those basic questions should you consider business strategy. Only after you understand the business model does business strategy even make sense.