Understanding the Framework Behind Business Models

Business Model Framework September 21, 2020

Lauren Christiansen

Writer

When building a house, the frame is the first to be constructed, acting as a stable base, otherwise, the house's longevity becomes compromised.

Just like a house, new businesses have to utilize a strong framework to achieve sustainability. A solid supporting structure helps attract new customers, generate profit, and promote growth.
A multidimensional approach is needed to ensure that a company has a strong foundation. Here's a summary of the various disciplines, plans, and techniques utilized to build a successful business model.

Business Model, Business Architecture, and Business Framework

Though often used interchangeably, business models, business architecture, and business frameworks are very different.

1. Business Model
A business model is a design or strategy for operating a successful business that delivers, creates, and captures value.

Business models focus on what customers need and how to meet those needs. Elements encompassed in a business model include-

Value Proposition Rationale for how an organization's product, service, or invention delivers value to customers
Revenue Distribution Identifying how the total income generated by the sale of the product/service is distributed among investors, owners, and other stakeholders
Sales Performance A sales team's ability to achieve sales goals
Competitive Advantage The conditions or circumstances that make an organization favorable or superior to other competing businesses
Key Resources The most important assets needed for a business model work

2. Business Architecture
Business architecture identifies how corporate business is structured. Typically, documents and diagrams are utilized to elaborate on a company's architectural structure and the services it provides.

Business models refer to the various ways an organization generates revenue, while the business architecture documents the structure. The following are all components of business architecture-

Business Strategy View The strategic goals that allow an organization to grow and innovate
Business Capabilities The capacity, materials, and expertise needed by an organization to function
Business Knowledge The shared terms of reference utilized in an organization and the relationship between these terms of reference
Business Operational View A description of the resources, tasks, and activities needed to run an organization

3. Business Model Framework
A business framework describes the management or organizational structure needed for a business to achieve desired goals. Whereas the business architecture broadly defines how an organization is structured, a business framework focuses on the exact business processes and procedures needed to support a successful business model.

An effective business framework creates a company environment where everyone works together to achieve common goals and objectives. Business frameworks include-

Goals and strategies
Policies and procedures
Company culture
Organization of the company
Business processes
Management duties and roles
Employee duties and roles
Tools and technology utilized
Company objectives

The Framework Behind a Business Model

Take the following steps to build a framework for a successful business model-

1. Develop a Customer Value Proposition
Construct a customer value proposition or a rationale of why a customer should buy the company's product or service. Identify the problem the customer is facing and the solution offered by the company. To determine the problem and solution, answer the following questions-

What are the customers trying to solve?
Why haven't they found a solution to their problem?
What options are available to them right now?
Why don't those options address the customers' needs?

Identify why the service/product offered by the company solves a customer problem more effectively than competitors.

Generally speaking, the more important the problem is to the customer, the more eager the customer is to find a solution. A cost-effective solution to a serious customer problem makes for a strong customer value proposition.

2. Identify a Profit Formula
A profit formula refers to how much revenue is generated after deducting any costs incurred from producing or selling a product/service focusing on-

Revenue Model How does the company plan to make money? What indirect or direct costs incurred will affect the company's ability to generate profit?
Cost Structure Determine whether all startup or overhead costs incurred are necessary to run a successful business. How does the company plan to account for these costs and still make a profit?
Resource Velocity Think about how many products/services the company can sell and pay for in a month or a year. Reevaluate the company's budget to ensure resources are used wisely.

3. Establish an Implementation Plan
The final step is to identify which resources and business processes are essential for implementing the company's value proposition, like-

Marketing and Sales What are the company's sales and marketing strategies? Are they effective at attracting new customers? How will the sales and marketing team demonstrate the value of purchasing the company's product/service to customers?
Operational & Manufacturing What are all of the internal steps taken to create and sell a product/service? Are the company's operating processes effective, productive, and sustainable?
Customer Service How does the customer service aspect of the company function? Can the customer easily find help when needed?
Quality Assurance How does the company plan to maintain the customer's desired level of quality for the service/product?
Competitive Edge How does the company plan to convince customers that its product/service is superior to an alternative offered by the competition? How can a competitive edge be maintained if the market and economic conditions evolve?