Chapter 1: Why Business Modeling

Chapter 1: Why Business
Modeling
1.0 What is a Model
A model is a simple representation of a
complex reality that serves a particular
purpose.
We use many models in our day-to-day life:
Street Maps: This model is built for a
purpose; to find a destination while driving
Examples of Scientific Models
Examples of Engineering
Models
2.0 What is a Business Model
A simple representation of the complex
reality of a business.
The primary purpose of a business model is
to communicate something about the
business to other people:
Employees
Customers
Partners
Suppliers
Note: By Business Model we do NOT mean
how the company makes money.
Examples of Business Models
A business process model is a business
model, showing who does what work and in
what sequence.
A business organization model is a business
model, showing how different people and
organizations interact with each other.
The art of building these business models is
called business modeling.
This course is about that art, about how to
create business models and how to solve
problems using business models.
Examples of Business Models
3.0 The Rise of Business
Modeling
Engineers use engineering models and
have done so for many years.
Every bridge, car, aircraft, and integrated
circuit is created using models.
Software engineering is a newer
engineering discipline, and the use of
modeling in software is more recent.
E.g. Unified Modeling Language (UML)
Business Modeling has been rare until
recent years
The Rise of Business
Modeling
Source: Business Modeling A Practical Guide to Realizing Business Value

4.0 Technology Adoption
Lifecycle
A depiction of how technologies progress
from their inception to wide adoption and
use. The technology adoption lifecycle is a
good framework for understanding the rise of
business modeling:
1. It is only adopted by innovators: people who
experiment with new technologies, shape
them, and improve them
2. It is adopted by early adopters: who use a
new technology to achieve a competitive
advantage before the technology is solid or
complete
Technology Adoption
Lifecycle
Continue:
3. It is adopted by the early majority: a large
group of people who welcome new
technology once it is mature
4. It is adopted by the late majority: who will
only use a technology after it is widely
adopted by others
5. It is adopted by the laggards: Skeptical
and only adopt a technology when they
feel the large costs of being left behind
Technology Adoption
Lifecycle
5.0 Business Modeling and Business
Transformation
Business transformations have become
more common since 1995
Business models make those business
transformations easier to manage
Business transformations include changes
of
Changes in Control: mergers, acquisitions,
divestitures, and leveraged buyouts
Changes in strategy and business process.
6.0 Business Modeling and
Managing Complexity
Another important driver of the increasing
interest in business modeling in recent
years is the need to manage increasing
complexity.
Businesses have become more complex.
Twenty years ago, businesses were easier
to understand
There were fewer business processes, fewer
products and services, less data stored in
databases, fewer business partners, and
fewer lines of business.
7.0 The Business Value of Business
Models
Why is it worth spending the time to create a
model?
Business models generate value in eight ways.
Business models support:
Communication between people
Training and learning
Persuasion and selling
Analysis of a business situation
Compliance management
Development of software requirements
Direct execution in software engines
Knowledge management and reuse
7.1 Communication
Business is a communication-intensive activity
Today most people use words, on-the-spot drawings,
and PowerPoint presentations to communicate on
these complex topics
Business models are better for conveying complex
business information. Business models dont replace
the words or the presentations. Instead they
compliment the communication by providing
something rigorous and concrete to point to. The
words and the slides are enhanced by the models.
People with different backgrounds can use models to
communicate, as long as they agree on the meaning
of the modeling elements
7.2 Training and Learning
People learn in two ways: from their own
experience, via trial and error, and they learn from
other peoples experiences, via conversations,
books, or classroom material
Learning from other peoples experiences is of
course cheaper, faster, and less risky. We allow
others to make mistakes instead of making our
own
Business models are surprisingly useful in training
A business process model naturally communicates
The task-by-task detail of how a job is performed
7.3 Persuasion and Selling
When we pitch a new initiative to our
management, we are persuading
When we convince employees to embrace
a business process change, we are
persuading
Persuasion is communication, of course,
but it is communication in service of a goal:
convincing someone to take action
favorable to us, to our organization, or to
themselves
Business models are useful for persuasion
7.4 Development of Software
Requirements
Requirements provide a description of what
a proposed software application should do
Without requirements, software developers
get lost in the details of code
Without detailed requirements, application
development projects fail
UML diagrams can depict and communicate
the business requirements to programmers
and developers
7.5 Direct Execution in Software
Engines
Business models can be executed directly
by a software engine
You do not have to write any line of code
E.g. Microsoft BizTalk Server
7.6 Knowledge Management and
Reuse
Knowledge management is the practice of
systematically capturing knowledge from
some people in an organization so that the
knowledge can be used by others
elsewhere in the organization.
Explicit Knowledge vs. Tacit Knowledge
When business modeling is practiced,
knowledge management becomes more
effective and useful
The Rigor of Business Modeling
Engineers have long used models in
designing all manner of engineered objects.
The engineering models bring rigor to the
design process.
Business modeling aims to bring the same
rigor to business. Business models address
the motivation of the business, the
business processes, the organization, and
the policies.
Case Study
A large energy company decided to replace its legacy
systems with a new implementation of an ERP package
The company performed no business modeling. Its
managers didnt understand how their business
processes fit with the business processes supported by
their ERP system.
They didnt understand how their policies differed from
the policies supported by the ERP system. They didnt
even realize that there were big differences.
As they began their implementation, end users
discovered some of the differences. The differences
resulted in customization requests to make the
software fit the business.
Conclusion
A business model is a model that describes the
details of a business: its goals, organizations,
business processes, or business rules.
Business models are created because they
produce business value. They make it easier for
people to communicate, learn, and persuade.
They support analysis of complex situations, and
they support compliance with laws and policies.
They serve as requirements for software
development and can be executed directly in
special-purpose software engines. And they
capture knowledge for others to use later.

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Source: Business Modeling A Practical Guide to Realizing Business Value

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