Theory of the Business Model

Three Sigma's Theory of the Business Model

This model is an application of a model described by Peter Drucker as "the theory of the business". The central tenet of this theory is that many businesses decline and fail because the assumptions they make that form the basis for their fundamental business decisions (about society, markets, customers, products, technology, their mission, etc.) become obsolete or invalid. Since the future is uncertain and the social environment is constantly changing, even the soundest business theories eventually become obsolete. For this reason every business and organization should periodically examine their fundamental assumptions to see if they continue to reflect the current realities they face and if not, how should they be changed. This model provides the organization and structure to identify and examine those assumptions and change them if necessary.

This model is applicable to business, government and non-profit organizations. It can also be used for new businesses and startups to identify, examine, and make explicit the assumptions that underlie their business planning.

Model design
Many of the core beliefs and assumptions underlying strategic decisions are implied rather than explicitly stated. Implied beliefs and assumptions are subject to individual interpretation which makes them vulnerable to inconsistency and obsolescence. This model is designed to help identify these implicit and explicit assumptions so they can be examined. This model is constructed in four parts and each part contains one or more modules. Strategic thinking is intellectually intense and requires time to think and reflect. It is a process that is best accomplished over a period of time. The structure of this model provides control over this process by breaking it into manageable segments which can be planned and scheduled to accommodate time for quality thinking and reflecting.
Using this model
The modules are the strategic and systems thinking building blocks of this model. Each one focuses on a specific strategic area and provides a process for discovering the critical implicit and explicit assumptions made and to examine the impact of these assumptions on the organization. System thinking looks for patterns of behavior. This requires an historical perspective. These modules provide a framework to examine past and present decisions and their underlying assumptions to see if any patterns or inconsistencies in thinking are apparent. This model also provides space to record these observations so they can be made explicit and examined. The "Past" column provides a place to record assumptions from previous defining periods in the company's history if they are relevant. The "Current" column should reflect the decisions and assumptions underlying your organization's current operations. The "Future" column is where you should record and make explicit the decisions and assumptions which will drive your organization's future. This "Future" column should not be completed until the current assumptions have been examined and evaluated. The assumptions discovered using this model should be compared with your current realities to evaluate their impact on current and future performance. Update any invalid or obsolete assumptions and re-examine your goals and strategies using these updated assumptions. The "Future" column can be used to record this information.
Copying and downloading this model
This model is presented in a condensed form on a single worksheet to make it easy to read and copy. The format uses Microsoft Excel 2000. It can be copied from this web page or downloaded. Each part or module can then be separated into its own worksheet and the columns and rows can then be expanded to any size desired. Contact Three Sigma for assistance if needed. Download this Microsoft Excel 2000 spread sheet right now as a self-extracting executable file (.exe), size 39k. Dont' have Microsoft Excel? Get a free Excel viewer from Microsoft; http://office.microsoft.com/downloads/2000/xlviewer.aspx
Three Sigma's assistance.
Discovering the assumptions behind fundamental strategic decisions and organizational focus is challenging and time consuming. It requires system thinking skills to identify the factors influencing these decisions and the assumptions upon which they are based. Three Sigma's help and coaching can facilitate and expedite this process.
Theory of the Business Model Part 1, Organizational Focus
Module 1, Mission
Strategic thinking begins with a re-examination of the organization's mission including its purpose and vision. For assistance in this examination refer to Making Your Mission Operational and A Strategic Thinking and Planning Workbook for Social Entrepreneurs and Nonprofit Executives in this website.
Mission elements	Past	Current	Future
1. State the purpose of your organization. The purpose defines the fundamental reason for your organization's existence and how it impacts the world.
2. State the core beliefs and or assumptions that provide the rationale for your purpose. These describe your perceptions of the social value and need for your organization, who it serves, and how it intends to contribute to society.
3. State the work you do to carry out your purpose and the recipients or beneficiaries of this work. This is how you impact your customers, employees, and society.
4. State what your organization is trying to accomplish in carrying out its purpose. This is your organizational vision and is typically stated as an overarching goal.
5. State how you measure or assess progress toward vision achievement and the standards you use to evaluate results.
6. State your key organizational goals. These are subdivisions of your vision that describe the operating, financial, social, and other conditions you must bring about to attain your vision.
7. State the indicators you use to measure goal achievement and the indicator values that will reflect success.
Strategic thinking. Analyze these mission elements for logic, reasonableness, and consistency. Identify the critical implicit or explicit assumptions that influenced your decision to enter or remain in this business or activity. This analysis may disclose that some or all of these mission elements were not considered. If you have difficulty identifying any of these mission elements, they were probably not considered. This is an implicit assumption that these elements were not relevant to your decision to enter or remain in this business or activity. Identifying and examining these assumptions is central to this strategic thinking process. Each assumption should complete the phrase, "We assumed that …..". Identifying assumptions can be difficult. An approach that could make this simpler is to ask for each mission element, "what must be true for us to be successful?"
Systems thinking. Evaluate these assumptions and your core beliefs against the current realities you face to determine if they are becoming obsolete or invalid. Assess the impact of this evaluation on your operations. Use the Future column of this module to define your updated beliefs and assumptions. Reexamine your mission using these updated assumptions.
Theory of the Business Model Part 2, The External Environment
Module 2, Society and Its Structure
Social, economic and political factors	Past	Current	Future
1. List the countries where your products/services are used. (The following questions should be answered for each country unless the answers are identical.)
2. List the demographic factors that influence the sale and use of your products/services. (Demographic factors include population and growth, age profile, education, income, ethnic mix, employment, occupations, etc.)
3. List the life style factors that influence the sale and use of your products/services. (These include home and vehicle ownership, consumption and recreation patterns, attitudes, values, etc.)
4. List the economic factors that influence your ability to provide your products/services. (These include interest rates, availability of credit or financing, exchange rates, stock market performance, economic growth, etc.)
5. List the political factors that influence the sale and use of your products/services. (These include type of government, market regulation, government regulation, government stability, political parties, environmental issues, taxes, unions, workman's compensation, etc.)
Strategic thinking. Analyze these social, economic and political factors to determine what implicit or explicit assumptions about them influenced your expectations and decisions. This analysis may disclose that some or all of these factors were not considered. If you have difficulty identifying factors in any of these categories, they were probably not considered. This is an implicit assumption that this factor or factors were not relevant to your operation. Identifying and examining these assumptions is central to this strategic thinking activity. Each assumption should complete the phrase, "We assumed that …..". Identifying assumptions can be difficult. An approach that could make this simpler is to ask for each socio-economic factor, "what must be true for us to be successful?"
Systems thinking. Evaluate these assumptions against the current realities you face to determine if they are becoming obsolete or invalid and their impact on your operations. Use the Future column of this module to define your updated assumptions. Reexamine your strategy and plans using these updated assumptions.
Module 3, Markets
Market factors	Past	Current	Future
1. List the products and services you offer.
2. Describe the market in which your products/services are offered.
3. Describe your customers and prospective customers within these markets
4. Describe how your products/services are distributed and sold (direct, through distributors, etc.).
5. Describe how your products/services are advertised and promoted.
6. Describe how your products/services are priced.
7. Describe what makes your products/services unique or why your customers buy them.
Strategic thinking. Analyze these market factors to determine what implicit or explicit assumptions about them influenced your expectations and decisions. This analysis may disclose that some or all of these factors were not considered. If you have difficulty identifying any of these market factors, they were probably not considered. This is an implicit assumption that this market factor or factors were not relevant to your operation. Identifying and examining these assumptions is central to this strategic thinking activity. Each assumption should complete the phrase, "We assumed that …..". Identifying assumptions can be difficult. An approach that could make this simpler is to ask for each market factor, "what must be true for us to be successful?"
Systems thinking. Evaluate these assumptions against the current realities you face to determine if they are becoming obsolete or invalid and their impact on your operations. Use the Future column of this module to define your updated assumptions. Reexamine your strategy and plans using these updated assumptions.
Module 4, Customers
Customer behavior factors	Past	Current	Future
1. Identify who makes the decision to purchase your products/services in each of the market segments where they are offered and where the purchasers are located.
2. Identify the critical value or values you provide that causes your customers to purchase your products/services rather than a competitor's. This is your tactical advantage.
3. Identify who uses your products/services in each of the market segments where they are offered and where these users are located. Include ultimate users if there are intermediate purchasers and users.
4. Identify how the the users and/or ultimate consumers use your products/services and what value your products/services provide them.
5. List other individuals or organizations that influence the purchase or use of your products/services (such as regulatory and certifying agencies) and where these individuals and organizations are located.
Strategic thinking. Analyze these customer behavior factors to determine what implicit or explicit assumptions about them influenced your expectations and decisions. This analysis may disclose that some or all of these behavior factors were not considered. If you have difficulty identifying any of these behavior factors, they were probably not considered. This is an implicit assumption that this behavior factor or factors were not relevant to your operation. Identifying and examining these assumptions is central to this strategic thinking activity. Each assumption should complete the phrase, "We assumed that …..". Identifying assumptions can be difficult. An approach that could make this simpler is to ask for each customer behavior factor, "what must be true for us to be successful?"
Systems thinking. Evaluate these assumptions against the current realities you face to determine if they are becoming obsolete or invalid and their impact on your operations. Use the Future column of this module to define your updated assumptions. Reexamine your strategy and plans using these updated assumptions.
Module 5, Technology
Technology factors	Past	Current	Future
1. Identify the technology that influences the design and manufacture or construction of your products.
2. Identify the technology that influences the distribution and sale of your products/services.
3. Identify the technology that influences the use of your products/services.
4. Identify the technology that influences the demand for your products/services.
5. Identify the technology that influences the characteristics and attributes your products/services must possess.
Strategic thinking. Analyze these technology factors to determine what implicit or explicit assumptions about them influenced your expectations and decisions. This analysis may disclose that some or all of these factors were not considered. If you have difficulty identifying technology factors in any of these categories, they were probably not considered. This is an implicit assumption that this factor or factors were not relevant to your operation. Identifying and examining these assumptions is central to this strategic thinking activity. Each assumption should complete the phrase, "We assumed that …..". Identifying assumptions can be difficult. An approach that could make this simpler is to ask for each technology factor, "what must be true for us to be successful?"
Systems thinking. Evaluate these assumptions against the current realities you face to determine if they are becoming obsolete or invalid and their impact on your operations. Use the Future column of this module to define your updated assumptions. Reexamine your strategy and plans using these updated assumptions.
Module 6, Industry Competitive Structure
Structural components	Past	Current	Future
1. List the suppliers that play a critical role in your operations.
2. List the major competitors that influence your operations.
3. List the potential new entries into the market that would influence your operations.
4. List the substitute products/services that could restructure the market.
5. List the market segments in which you offer products and/or services. A market segment is a grouping of buyers and sellers within a market into categories that reflect their important differences (i.e. original equipment manufacturers, aftermarket distributors).
6. Identify which of these industry components poses the greatest threat to your operations and why. Prioritize the threats posed by the remaining components.
7. Describe the actions you are taking to overcome or neutralize these threats.
Strategic thinking. Analyze these structural components to determine what implicit or explicit assumptions about them influenced your expectations and decisions. This analysis may disclose that some or all of these factors were not considered. If you have difficulty identifying any of these structural components, they were probably not considered. This is an implicit assumption that this component or components were not relevant to your operation. Identifying and examining these assumptions is central to this strategic thinking activity. Each assumption should complete the phrase, "We assumed that …..". Identifying assumptions can be difficult. An approach that could make this simpler is to ask for each industry component, "what must be true for us to be successful?"
Systems thinking. Evaluate these assumptions against the current realities you face to determine if they are becoming obsolete or invalid and their impact on your operations. Use the Future column of this module to define your updated assumptions. Reexamine your strategy and plans using these updated assumptions.
Theory of the Business Model Part 3, Competitive Advantage and Core Competencies
Module 7, Competitive Advantage and Core Competencies
Skill sets	Past	Current	Future
1. List the organizational competencies needed to provide your products/services to the users.
2. List the organizational competencies in which you must excel to provide the quality and service demanded by the users of your products/services.
3. List the organizational competencies that enable your organization to provide the product characteristics or service attributes that cause the customer to decide to purchase your product rather than a competitor's. These are core competencies if they are unique to you or you perform them significantly better than others.
4. List any other competencies your organization possesses that create customer value throughout your product line or give you a significant cost advantage over your competitors. These are also core competencies.
Strategic thinking. Analyze these organizational competencies to determine what implicit or explicit assumptions about them influenced your expectations and decisions. This analysis may disclose that some or all of these competencies were not considered. If you have difficulty identifying any of these competencies, they were probably not considered. This is an implicit assumption that they were not relevant to your business expectations and decisions. Identifying and examining these assumptions is central to this strategic thinking activity. Each assumption should complete the phrase, "We assumed that …..". Identifying assumptions can be difficult. An approach that could make this simpler is to ask for each skill set, "what must be true for us to be successful?"
Systems thinking. Evaluate these assumptions against the current realities you face to determine if they are becoming obsolete or invalid and their impact on your operations. Use the Future column of this module to define your updated beliefs and assumptions. Reexamine your strategy and plans using these updated assumptions.
Theory of the Business Model Part 4, The Big Picture
Module 8, Reviewing Your Theory Of The Business
Assumptions	Past	Current	Future
1. List the mission assumptions you identified in module 1.
2. List the social, economic, and political assumptions you identified in Module 2.
3. List the market assumptions you identified in Module 3.
4. List the customer behavior assumptions you identified in module 4.
5. List the technology assumptions you identified in module 5.
6. List the industry structure assumptions you identified in module 6.
7. List the core competencies assumptions you identified in module 7.
Strategic Thinking. Examine these assumptions for logic, reasonableness, and consistency. Reconcile any inconsistencies.
Systems Thinking. Identify and rank order those assumptions that are most critical to your operations. Evaluate these assumptions against current observed behavior patterns and operating results to see if they are becoming obsolete or invalid. Update any obsolete or invalid assumptions. Record these assumptions in the Future column of this worksheet. Re-evaluate your competitive strategy in light of these new assumptions. A Competitive Strategy Model will help you define your competitive strategy.
Contact Three Sigma for help facilitating your systems thinking.