Understanding business models is a key to successful project management. Why?
If you can understand the business model that you are supporting, you will be better able to create a stronger and more relevant project charter and plan. You will be in a much better position to measure your project’s success throughout execution based upon solid metrics. You can provide more relevant advice in the myriad conversations you will have with your clients and stakeholders throughout the project.
Another benefit is that it will help shape your big picture perspective and advance your career!
Why Business Models are Important
There is an overall business model for your organization, and probably multiple sub-business models at work as well. How well these business models are constructed, understood, and managed – especially in harmony with each other – has a profound effect on the success of the organization. Business models apply to any organization, whether large or small, startup or established, private or public sector.
Business models provide the underpinnings for staying power – the ability for the organization to stay on its mission driven course through good and bad times and changing conditions.
The Key Components of a Business Model
A common way to look at business models is a breakdown into the four components below. Business models and all four components apply to any organization: for profit, non-profit, or government.
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- Value proposition – This is a product or service that can help targeted customers get a job done better, more efficiently, and/or more affordably than otherwise.
- Resources – This includes the people, products, intellectual property, supplies, equipment, facilities, finances, and other tangible entities that are required to deliver the value proposition to the target customers.
- Processes – This includes how the resources are combined or configured, as well as the habitual ways of working together that emerge in the regular execution of tasks to successfully deliver the value proposition.
- Fiscal formula – This includes the pricing, margins, required funding, inventory turns, volumes that are necessary to cover the costs of the resources and processes and maintain fiscal health while delivering the value proposition.
Different value propositions require different business models – that is, different configurations of the resources, processes, and fiscal formula – to succeed. Each situation requires a unique combination of the components of the business model, and a business model that works in one situation may not work at all in another situation.
This is why it is extremely important that you as a project manager are cognizant of the business model(s) at play in the situation related to your project. Doing so enables you to make informed decisions, provide insightful advice to clients, and measure project progress with relevant metrics.
The Key Types of Business Models
I would like to reference the work of Professor Oystein Fjelstad of the Norwegian School of Management and his colleague Charles Stabell. With a ‘jobs to be done‘ orientation to business models, as they developed a framework defining three general types of business models:
Also known as solutions shops, this business model applies when the organization provides a high degree of customization and judgment in the products and services it provides.
Solution shops solve unstructured problems, and their key resources are people, who are experts and apply their intuition, training, and analytical/problem-solving abilities to these unstructured problems.
The business model that solutions shops usually follow is one of fee-for-service, but occasionally they may also charge contingency fees based on the outcome.
Also known as Value Added Process (VAP), such organizations are part of a value chain ecosystem where they accept inputs, add value to them, and ship out value added output further down the value chain.
Chains transform inputs of resources – such as people, materials, energy, equipment, information, and capital – into higher value output. The work done tends to be repetitive, so that, in contrast to solution shops, the value added tends to be embedded in the processes. Applied to situations that can respond to continuous refinement and optimization of the processes, chains can deliver value in those situations far more effectively than can shops.
The business model that chains usually employ is to bill customers for results, or output as opposed to input. This is due to the characteristic that for chains the value is primarily embedded in the equipment and processes rather than the individual expertise of people, and results or output is so well-controlled that it can almost be guaranteed. This ‘fixed price’ approach for chain differs completely from the ‘fee for service’ approach of shops.
Also known as ‘facilitated networks’, network businesses thrive on the connections they have across nodes – usually people of different types and combinations within a particular ecosystem that add value for each other. Leveraging those connections is the primary source of value added for the organization.
Revenue is generated by organizing, facilitating, and maintaining the effective operation of the network. Usually, the value of the network is proportional to its size, which is usually measured by the number of customers participating. However, compatibility of the members is also critically important.
The business model for networks is to typically generate revenue through membership or transaction-based fees.
Note that these types of business models can work well together in many situations, and can often exist under the same roof (i.e. within the same organization). For example, a shop may diagnose a complex problem, recommend a solution that is delivered by a chain, and a network may provide support and community.
Leverage Strategic Business Models for Project Success
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Business models are not static; they need to evolve with changing conditions, whether influenced by competition, technology, trends, or other influences. There is also a need – or a tendency – for business models to ‘settle in’ and define the business, where a clear way of doing business emerges and becomes deeply embedded.
In those common situations, it is equally critical to understand what might NOT work on a project due to that well-established business model. Within an organization, business models need to be compatible with each other, or need to be independent and unconnected.
In his book, “The Innovator’s Prescription: A Disruptive Solution for Healthcare”, Clayton Christenson said, “Proprietary integration of the company’s resources, processes, and profit formula in order to do a job that the customer is trying to do is the essence of competitive advantage.” To be an effective strategic project manager, develop and apply your understanding of strategic business models for project success.
Strategic business models are effective when they uniquely combine the company’s resources, processes, and profit formula to get something valuable done for the customer. It is important for PM professionals to not only be aware of the current business model, but to notice when changes are happening that might require the business model to evolve.