What business are you in? Business models as social constructs

June 8th, 2011 by Patrick Stähler

“What business are you in?” sounds like a simple question. But it’s not. How you define your business determines which direction your firm can go. Based on your answer, you define and limit your strategic options.

In a company, the business model is defined by a dominant group of people. They have a common understanding of what business they are in and how they create value. However, the business model is not an absolute reality. It’s a social construct of dominant opinion makers, e.g. your top management. This is important to understand.

By taking a different look at your business, and thereby challenging your dominant logic, you can identify more and different strategic options for your firm. But beware; by doing so, you are also challenging the top dogs in your firm.

Life is not that simple. Changing perspectives by xkcd.com

How you define your business depends on the dominant logic of your management

Considering the definition of what a business model is, it seems easy to describe the business model of a company. You can use  the business model canvas (Alex Osterwalder‘s or mine) and then you describe how value is created. Often we assume that regardless of who describes the business model, we will end up with the same description. This is a mistake.

Some hard facts like the value chain or the products can be easily identified but as soon as we approach the value proposition, things get a bit more confusing. Why is this? The answer depends on who answers the question.

Take groups close to your firm: Will the board of your company have the same view as your customers? What about your employees and top management?

Hopefully your executive board will answer the question very similarly. However as I have seen in many consulting projects, that is not usually the case. And even the simple question of who your customers are is a tricky one. Are your customers your users or your paying customers? This is a particularly tough question in double-sided business models.

If you sell to end consumers through retailers, are your customers your channel partners like Walmart or the end customers? This is exactly the discussion you might have within your firm.

Ask customers the question of your value proposition. The answer will be different again. Do your customers understand your value proposition? Do you offer the value you promise with your value architecture also? (see post on value perception vs. value proposition).

In well-managed firms, there is a common and dominant logic of your business

In well-managed firms, we see a common and shared view of the value proposition and of the other components of a business model. Management of these firms is much easier because there is a common understanding of what you do and what makes you unique. In such firms, micro management isn’t necessary since everybody understands his or her role in the company. Innovation is still hard work, but since you understand your customer well, you regularly bring out innovations for your current customers.

Caveat!

What sounds like a dream may be a double-edged sword. Dream businesses can exist if technologies develop along known paths, if you have a clearly defined set of competitors, if your customers have stable and predictable needs and if you have found a business model which can thrive in stable conditions. That’s a lot of ifs! If times are changing, you might be trapped in your way of looking at the world.

The better you adjust to stable business conditions (sustaining), the more difficult you will have with disruptions or unpredictable situations. This is what Clayton Christensen calls Innovators’ Dilemma. Your dominant logic works as a filter. Information is filtered and interpreted in a way that fits your view of the world.

Business Model(s) of the Yellow Pages

The best way to illustrate my point that business models are a social construct and not an absolute reality is to take an industry of business directories, like yellow pages. What is the business model of the yellow pages?

1. Yellow pages as publishers of Yellow Pages and other directories (a product based definition)

If we go back some 15 years, we could easily describe the business model of directories as publishers of paper directories in the form of white pages (private addresses) and yellow pages (business addresses). When you subscribe to this view, you might have envisioned an integrated value chain with its own printing facilities. Even the printing faction of the yellow pages businesses has shifted to online directory services. For such companies, going online was a great step forward, even if it meant simply transferring their business model from paper to online.

2. The search & find business

Another way to look at directory services is to look at the jobs or problems they solve for customers. Remember that the job-to-be-done is a core-defining element of the value proposition. Well, which job does a directory service solve for its clients?

Directory services offer the chance to FIND somebody when somebody else SEARCHes for them. So, the business can be called “Search & Find” business. In this view, one defines the business by the end users and the job you help them solve.

If your dominant logic is grounded in the Search & Find business, you probably understand that customers need more than a flat directory of businesses (today called yellow pages). How about adding recommendations to the business listings like Yelp or Qype are doing? How about making specialized sites for certain professions such as craftsmen or doctors like Angie’s List . After all, people are looking for the best doctor in town, not just any doctor.

When you see your business in this way, you move away from a flat search (finding little information about everything) to a deep search (finding specialized information about a niche). Think about it: Google will probably always beat you in flat search so you better go into deep search.

3. The lead generating business

A third way to define your business takes both the end-user and the paying customer into account. In the case of directory services, your customers are small and mid-sized businesses who you sell ads to.

What problem do the SMEs want to solve with an ad or a bold listing in your directory? Well, they want to be found in order to generate more and better leads with the ad. With these glasses on, you are in the Lead Generating Business. This is quite different from the other two perspectives.

What happens if you take this view? You will probably realize that you have one of the best local sales forces for SMEs as a key asset and part of your core capabilities. And why not leverage your key assets to sell a whole range of products to SMEs that help them to generate more and better leads? Why not sell Google Adwords? With this view of the world, Google is a partner and not a mammoth competitor anymore. Google’s weakness in local business is its weak sales force. They are a technology firm. You have a great local sales force and you will never beat Google in search. Why not join them? Google can be your partner.

In the lead generating business, you suddenly see fresh competitors that compete for the same job and for the same clients’ budget. Groupon and its clones are exactly doing this: Competing for the lead generating business.

4. The Address source

A fourth way of defining what kind of business you are starts by looking at the core competencies. As a directory company, you have or had the best address material for individuals and businesses. You could call yourself an address business.

Potential strategic options would include moving into identity and address management for businesses and individuals. In this situation, you would sell addresses to business and keep the main address of individuals. Unfortunately, it’s a bit late for this kind of business because new directory services have appeared in the form of social networks like Facebook, LinkedIn and Xing. Now, individuals or business maintain their own profiles on these sites.

Conclusion: A business model is a social construct

All four perspectives of the business model are logical and supported by facts. They are totally different descriptions of the same business. Each view allows for very different strategic options. Even the competitors change with each different view of the business. of the business.

It is very important to understand that your business model is not a static and fixed model, it’s the construct of a dominant group of people in your firm.

Challenge the dominant logic with the business model canvas to see new strategic options

You see very different strategic options if you define your business differently. A great way to do this is to better understand the problem you solve for your customer.

Different perspectives open new options by xkcd.com

I illustrated this two years ago in a post on the newspaper industry. The classic business model of a newspaper consisted of three different businesses brought together by a shared medium: paper.

  1. The first kind of business you are in concerns the reader. You provide news, background information and entertainment in exchange for the reader’s attention and a small amount of money (just 30% of total revenues, but even less of a contribution margin).
  2. The second business you are in is to sell the reader’s attention to advertisers. And this is where the margins were made in the past.
  3. The third is the classifieds business. Here, a paper functions as a market place. As we see on the Internet, you do not need content to sell advertising or classifieds. Google and Craig’s List have proven this.

The pity for the newspaper industry is that most of the costs come from the first business, the content, but the revenue comes from the second and third businesses (here a post on the changing economics of newspapers). In this case , the jobs-to-be done analysis is a frustrating one since you see that just moving your content online will never be a profitable business.

Ways to define your business model and starting points for innovation

Taking the yellow pages example, we can identify four defining elements

  • The product you offer
  • The problems and jobs you solve for your users
  • The problems and jobs you solve for your paying customers
  • Your core competences

But there are even more elements that you can define your business around.

  • The core input or raw material used in your production. This is the way how the plastics industry defines itself. The oil industry and other traditional commodity industries do, too.
  • The core production process. Food processing industries focus on this.

Reconstructing your firm by taking another perspective will allow you to see fresh, strategic options which will lead to business model innovations. Take the business model canvas and play with the components. You will see there are more options than you can handle. So please never say that you have no idea how to reinvent your business. Ideas come easily, but executing these ideas is the tough part.

Regardless of which definition you choose, be aware that it is only a construct able to be changed. Competition will not care about your definition. Your success will come from new ways of solving a problem for your customers. And do not complain of unfairness when a competitor enters the arena and breaks all of the rules that you thought were holy. All of these rules made sense in your way of looking at your business, but your competitor, who defines his business totally differently, is acting in a totally fair and just manner. This is what we see in the moment between the content industry which is being challenged by Google in the search and find industry.

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