Thursday, 7 November 2013 00:00
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By Shabiya Ali Ahlam
Modelling a business is often a CEO’s nightmare since the world’s economic environment is ever-changing. From Sri Lanka’s perspective, the country is seeing rapid growth in many industries and is facing regional competition as it aims to be a middle income nation.
In order to get the maximum value from the ongoing initiatives, it is more important now to look at the prevailing business models and ensure they are still relevant.
Identifying the importance of building business models that are appropriate in the current context, the Chartered Institute of Management Accountants (CIMA) hosted its CEOs breakfast forum yesterday under the theme ‘Business Models for Tomorrow’s Companies’.
Led by CIMA Chief Executive Charles Tilley, the event was attended by top business heads representing diverse sectors.
The visiting Chief Executive highlighted to the audience the relevance of a business model, its key issues, how it creates value, for whom the value is created, the elements of integrated reporting and the role of Management Accountants (MAs) in the context of business models.
What are business models all about?
When observing business functions, it is obvious that all businesses need to have a model if they are to operate in a successful manner. While business models are also about value creation, Tilley opined that businesses should know for whom the value is created.
“For the private sector, it is about profit and clients. For the public sector, it is much more complex. It is about providing returns for the tax paid by citizens. It is about ensuring that society is benefitting from the activities driven by that model,” he said.
Why should businesses worry about models? They should, Tilley said, since it is absolutely crucial that everybody understands how value is created. Whilst the needs and wants of consumers haven’t changed, the ways and means in which value is delivered has changed to a great extent.
Just as before, people are still making calls, listening to music and taking pictures. The activities have remained the same but what is changing is the technology used, he pointed out. While the examples of change in the use of technology are many, businesses need to understand what is going on in the external environment if they are to sustain their existence.
How can value be created?
According to Tilley, value creation is rather simple. To create value, business should meet the needs of its customers, ensure its processes are efficient, be recognised as a good corporate citizen, reduce the impact of its operations to the environment, and most importantly, minimise the impact of competitive activity.
“An extraordinary formula for value creation is linking customer needs, efficient processes, reducing environmental impact, and minimising impact of competitive activities. The better business link between these elements, the more cash it will produce and the more profit it will make. Therefore it is very much about creating value overtime. And these are areas that would have to be thought-out in the very challenging world in which we operate,” noted Tilley.
When looking at integrated reporting, in the past 40 years it is noticed that 80% of market capitalisation of companies were in its balance sheet. Today however the figure is well below 20% and is further reducing as technology takes the lead in driving change.
There being a clear need for companies to revise their reporting systems, Tilley shared that a platform is being developed to accommodate this. It was the need to change reporting systems that resulted in the formation of the International Reporting Council and the concept of Integrated Reporting (IR).
Pointing out that this is very much the position of business today, Tilley said: “It looks at the opportunities and risks of the business and how value is created over time. The heart of that activity is the business model.”
Elements to consider when modelling a business
Although the way of looking at the factors is rather simple, Tilley stressed the identification of a number of elements.
The first is the external environment. In the current context, the external environment has to be continuously scanned to understand its impact on business activities. For business inputs, the need for identifying the needs and wants of a consumer is highly imperative, he said.
To identify inputs, integrated reporting helps in this regard as it considers six capitals components, which are: financial, manufacturing, intellectual, human, natural, social and relationship capital. “The six capitals are to a greater or lesser extent needed in a business. While the business will be paying for some of the capital, some will be given by society,” Tilley explained.
In financial space, business will be paying interest, dividends and debts, whereas society will facilitate grants through regulation. It is in that scenario where effective reporting is important.
“The basic concept in terms of looking after the resources is how businesses shepherd the situation to ensure the right allocation and utilisation of capital. That is by having the right intellectual property, and the right people coming into the business who are effectively trained with the right skill set,” he added.
The issue according to him is that businesses have to be run on a series of resources. Ensuring the availability of resources for the organisation is important to be able to drive forward in the medium and long term.
Impact of business models
While many opine that business models affect only an organisation, the reality is that the business is only a small area that gets impacted. To be successful in terms of creating value for customers, and creating the need for the regulators and the society, businesses need to think of all levels of their operations.
Shedding light on areas ignored by businesses in the past, he said service centres have been given less prominence by many organisations. Many companies have outsourced their service centres since most business that were having problems in that area decided to hand over the operation to experts in that arena.
For Tilley this is “absolutely the wrong way out”. “When outsourcing, it means a business is handing over its profit to someone else. Outsourcing activities need to be managed the same way a company is handling its other operations,” he stressed.
In terms of the supply chain, reputation is top priority. With the collapse of Rana Plaza in Bangladesh that occurred earlier this year, the retailers in the UK who were manufacturing from that factory had a significant impact on their reputation. This, Tilley said, stresses the need for businesses to manage their entire supply chain.
Business models should also think about the value of time. Although businesses are continuously forced into short term-ism, the presence of a mission statement stresses that fact that it wants to be in existence for a longer period of time.
“All the successful companies have been around for a long time because they typically understand their business models. They understand how they create money and how they need to change over the time.”
Issues of business models
The key issue with regard to business models is that they are just a tool. The challenge is to use the tool to innovate businesses and upgrade its value for a better conversation in the boardroom, stated Tilley.
Understanding a business model, it is essentially about two aspects that are crucial. The first is priority. It is easy for a business to experience a fall if it doesn’t have a framework in which the business model operates. Business models operating in that framework allow in priority setting.
The second is risk. While most businesses spend their time thinking about risks, they miss exploring areas they are unaware of. If risks are thought-out in the context of business models, their assessment becomes relatively easy. Tilley opined that by doing so, business can focus on the issues in terms of inputs, activities, outputs and outcomes, along with linking reputation to all the elements.
What creates and drives values?
“Accountants are very good at measuring financials, but it is much more challenging to measure the impact of value drivers,” noted Tilley. A survey conducted with 300 chief executives in this regard brought to light a number of issues, of which two were particularly relevant.
He said that many CEOs felt they spend too much time on the financials and not enough time on the value drivers. “When investing in training, people, and R&D, the businesses were unsure of their outcomes. So the big issue for us to think about is how output can be measured.”
The second issue highlighted is how they find it difficult to manage their business comprehensively rather than managing it as a series of silos. “Business models really can help understand the processes in that regard,” he noted.
Stressing the importance of having people at the heart of the business, Tilley noted the organisation ‘Virgin’ is a classic example to follow. Although it has explored a number of business areas, it has managed to achieve loyalty amongst its staff.
“We all say in our annual report that the most important asset is employees. So how is the business managing to create loyalty and ensure that its people are customer-focused and offer better sales services? This is a key issue that should be worked on,” he stressed.
Taking the example of Burberry, which at one time was a failing organisation in the clothes arena that managed to return to success, he said it did this by not only changing its appeal to the younger generation, but also taking real control of its supply chain.
Effects of globalisation
With globalisation, all nations are equally affected by shocks in external environment.
He shared that when talking to the CFO of Unilever on risks and strategies, he had stated that the company could not develop strategies for emerging markets the same way it could for the Western economies. With Tilley unable to understand what he meant, the CFO had said that if the company produced shampoo for the emerging markets the way it did for the Western markets, countries like India and China would soon run out of water. The company did not want to produce the same product for both the markets since the two markets used different amounts of water for hair wash.
“The problem was obvious. It was about looking outside the whole time. It was about the environment we are operating in and considering what should be done. So the focus of Unilever was on sustainability and therefore they want to make environmentally friendly products. This has helped them build their market by satisfying all stakeholders,” he explained.
Innovation
Tilley introduced the audience to a number of new terms, of which one was ‘freemium’. This is where the basic service is offered for free and organisations only pay for the add-ons. Platforms such as LinkedIn and DropBox use this new business model.
The peer-to-peer business model is where there is global connectivity. Companies like ‘Zipcar’ are taking forward this model as it allows customers to rent cars that are idle on the streets.
Innovation in terms of technology is what is greatly witnessed in all parts of the world. Tilley stated that there once was an enormous concern that retailers on high-street were going to disappear since many started using the internet for sales. The big names in retailing such as Tesco managed to combine the online with the physical, the bricks to clicks.
“Change should be embraced. We cannot be slow in this since the world is moving at a much faster pace. While customer focus should never be forgotten, not paying attention to that will eventually result in the loss of market share. Therefore technology should be used as a driver for the business and we have to acknowledge that to move forward and embrace change,” he said.
Role of MAs
Where are MAs in the business? Tilley called them the co-pilots. They are the ones who plan, navigate, and help the organisation to reach its goal. “In today’s world, being an MA and not understanding how the business works is not good. MAs have to be fluent about the business. If the pilot is not available, they should be able to help manage the business,” said Tilley.
Looking at how they can add value, in the cost leadership area, he said it is highly important for MAs to play a key role in this area.
Pix by Lasantha Kumara
