Inside Architecture

Notes on Enterprise Architecture, Business Alignment, Interesting Trends, and anything else that interests me this week...

August, 2013

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  • Inside Architecture

    Business Architects: Do Not Start With Strategy

    • 14 Comments

    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.

    Why?

    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.

    image

     

    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.

  • Inside Architecture

    Business Models in Business Architecture

    • 4 Comments

    It still surprises me to see various discussions of business architecture where there is a poor understanding of the relationship between business models and business capabilities.  The vast majority of discussions of business architecture, including books, articles, and blogs, make very little mention of business models, and nearly never discuss their relationship with business capabilities, organizations, stakeholders or resources. 

    To me, the concept of a business model is fundamental to using business capabilities.  I cannot imagine attempting to understand a commercial organization without understanding the business models of that organization as a first step. 

    In this post, I will discuss the reasons why business architects must consider business models.  I’ll start with some definitions to minimize confusion, given the fact that everyone has different definitions of these concepts.  I’ll then discuss the concerns that I have about the lack of integration of core concepts.  In a future post, I will discuss the various information models for including business models into business architecture as well as needed changes to business architecture methods (including capability analysis) in order to correctly place this role.

    Caveat Emptor: The following discussion of business models will focus on commercial systems.  If you are examining this space from the standpoint of a non-profit organization or government agency, your needs may not be well represented.  My apologies.  The reason for this will be immediately apparent when you read the definition of “business model” below.

    Definitions

    The Business Architecture Society and the Business Architecture Guild have joined forces and created a common definition of a “business capability.”  From the Business Architecture Body of Knowledge Handbook: “A business capability is a particular ability or capacity that a business may possess or exchange to achieve a specific purpose or outcome.”  Note that the BIZBOK cites Ulrich Homann as the originator of the definition.  For the sake of this discussion, let’s take this definition as a given.

    There are many definitions of a business model.  Perhaps the most popular definition today comes from Alexander Osterwalder, author of the popular business book “Business Model Generation.”  However, his book doesn’t have the same level of discussion of a definition as the Ph.D. thesis that he wrote in which he defines a business model as follows.  “A business model is a conceptual tool that contains a set of elements and their relationships and allows expressing a company’s logic of earning money.  It is a description of the value a company offers to one or several segments of customers and the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital, in order to generate profitable and sustainable revenue streams.” [Osterwalder, 2004]

    Osterwalder carefully notes that a business model is not a representation of the business organization itself.  He states, and I concur, that the business organization is the “material form that the conceptual business model takes in the real world”. [Osterwalder, 2004]

    I will also take a moment to define business strategy.  This time, from Kaplan and Norton: Business strategy is a description of how an organization intends to create value for its shareholders, customers and citizens.  Note that this is not the same as a business model. Osterwalder addresses this distinction by illustrating that one can view strategy, business model, and process model as a three-tier hierarchy.  The top level, business strategy, describes the conceptual approach to business change.  The business model goes into more detail, describing the relationships between various components.  The third level, process, illustrates the association of activities to the people and business functions that will perform them.  All three are necessary, but all three are different in level of detail and analysis.  The following picture is directly from his Ph.D. thesis (click to enlarge for readability).

    Osterwalder

     

    Concerns

    One of the challenges in bringing together these concepts is the fact that most business architecture references make no mention of business models or describe business models as a “side concern”, and most of the business model literature makes no reference to business capabilities.  I attempted to address this gap in the paper where I introduced the Enterprise Business Motivation Model, back in 2008.  While the model has dramatically improved since then, the core motivation remains the same: to integrate these two concepts into a single coherent approach to understanding and modeling a business.

    Business architecture cares about the organization of a company.  It also cares about the resources or tools in a company.  Business architecture cares about the processes, and the information.  These elements are all brought together in the understanding of a business capability.  Business architecture also cares about strategy.  However, as Osterwalder notes, connecting strategy to organization or processes without an understanding of the business models is a partial understanding at best.

    Let’s be clear about one thing.  Business strategy is related to business models.  In fact I will go further to say that all effective business strategy applies to one model at a time.  Business strategy that applies to more than one model is not strategy.  It is either a goal, a principle, or a vision of some kind.  A strategy, by definition, has to express “how” the goal will be achieved, and that requires the context of a business in which to achieve it.  I know that this may be controversial, but it is CORE to my understanding and the experience I want to share.

    So let’s look at the viewpoints of business model proponents and business architects.

    So what if these two viewpoints differ?  What’s the downside?

    There are a number of problems within large organizations that cannot be solved by business architects without a consistent and careful understanding of business models.  These problems are tenacious and challenging.

    1. Conflicting strategies: Most large organizations have many business models.  Frequently, there are senior leaders who are focused on making one business model successful without any concern for other business models.  Those leaders will create strategies for improving their model, sometimes to the detriment of other leaders and their models.  This leads to political infighting and friction as teams reporting to different leaders are left to “fight it out” when one strategy directly conflicts with another.
    2. Inconsistent understanding among Leaders: It is common for business leaders to be only vaguely aware of the potential for interaction between their model and the models of other leaders.  Therefore, their words and actions will not reflect a consistent and mature understanding of those other models.  This drives serious inconsistencies into their organizations.  This lack of consistent understanding turns into poor assumptions, simplistic rationalizations, and invalid arguments. 
    3. No prioritization produces confusion among shared services: Without understanding what the models are, it is impossible to rationally prioritize the relative importance of those models to the success of the enterprise.  However, it is quite common that multiple leaders leverage shared services within an enterprise (like human resources, legal and IT).  Without the ability to prioritize and create constructive conversations, these “shared functions” are driven to create complex and conflicting services that are expensive to maintain and resistant to change.


    I would like to suggest that three of the key value propositions for business and enterprise architecture lies in addressing these specific challenges.  In other words, Business architecture is only effective if it copes with conflicting strategies, inconsistent understanding, and indecisiveness caused by poor prioritization.

    Conclusion: Including business models directly into the business architecture practice is critical to quality.  Failure to include them is a recipe for disaster.

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